The Frightening Idea of $100 Oil

Let’s talk about the somewhat — no, tremendously — daunting phenomenon that we’ll almost certainly be facing in the not-too-distant future: $100 per barrel of oil. We’re already in the 90s and trending upward. I well recall that, as an operative of Pennzoil Company — now part of Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) — earlier in my career, I knew $100 crude was on the horizon. The big surprise is that it didn’t arrive far sooner.

Let’s look for a minute at the reasons that crude has gone from around $60 per barrel to almost $100 per barrel just this year. Of course, there’s supply and demand. Specifically on the demand side, we realized a few years ago that the nations of the developing world (read, China and India) were using far more petroleum products each year, with little likelihood that their new growth rates would subside.

There are also other factors such as increased futures speculation in the oil markets, a relatively new phenomenon that’s raised the crude price by goodness knows how much. Beyond that, many of the producing nations — I’m thinking about such places as Venezuela, Nigeria, Iran, Iraq, and, yes, Russia — are at least somewhat less than dependable politically. During this year, fear has increased that one or more of those garden spots could erupt, playing havoc with the fear premium in the oil price.

Last, but not least, are the sliding U.S. dollar and percolating concerns that, while global demand for oil continues to rise, the world is slowly losing its ability to increase production apace. It’s my conviction that the latter consideration will only increase in importance in the years to come.

Motley Fool