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Why oil is headed back to $100

Why oil is headed back to $100

2009-10-29

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Oil is now flirting with $80 per barrel. In January, while many other analysts were predicting $40 to $60 oil, I predicted that oil would soon be back at $100.

There are obvious and real underlying reasons for the escalating oil prices. But news headlines have ruled the price of oil since at least 2004. There was no real rational economic reason for oil to reach almost $150 (which for people with short memories may seem to have happened last century – it happened in July 2008) nor was there any reason for below-$40 oil, which happened right after the economic crisis hit last fall.

The crisis overshadowed a November report by the International Energy Agency which showed that oil production from operating wells has been declining by 9.1% per year. That news should have sent oil prices dramatically higher, perhaps to $200. Even now, there is a lingering possibility that a strike by Israel on Iran could close the Straits of Hormuz and thus shoot the price into the stratosphere overnight.

The headlines started in 2004 and included the Abu Ghraib photographs, which increased enormously the fear factor in the Middle East. There was the re-Sovietization of Russia’s oil industry following the assault on Yukos by Russia’s then-president, Vladimir Putin, and the re-nationalization of Venezuela’s oil industry by the Hugo Chavez government. That perfect storm of headlines created one of the most telling and repeatable events from 2004 to last year’s economic collapse. With escalating energy and energy product prices, every quarter ExxonMobil, the largest multinational oil company, would announce the biggest profits of any company in the history of the world and “Big Oil” would be in the mouth of many politicians in many countries as the devil incarnate. And yet despite those huge profits, Exxon’s stock would often fall because the company would also announce that their oil production and reserves were declining. Shut out of reserves in some of the most prolific oil provinces of the world, such as Russia and Venezuela, international Big Oil was, and is, in trouble.





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