Two Big Reasons Crude Will Go Higher

There would seem to be enough reasons for crude oil to continue its assault on $100, but two more have cropped up, and they may be more powerful than the rest.

New information shows that the supply of crude oil may stop growing almost completely. Oil production runs about 85 million barrels a day. That may grow some, but by 2012 the amount of oil that can be practically drilled, shipped, and refined may peak. Demand, however, is likely to continue higher.

According to The Wall Street Journal "the emergence of a production ceiling would mark a monumental shift in the energy world. Oil production has averaged a 2.3% annual growth rate since 1965, according to statistics compiled by British oil giant BP PLC (BP)." Recently, the head of Conoco (COP) said that oil production is not likely to ever rise above 100 million barrels a day.

Over at OPEC, concerns about raising production to help consuming nations appears to be close to nil. Comments from the recent meeting of the cartel did not indicate any new oil supply will be released. And, worse, OPEC sees no economic incentive to sell more oil. The value of the dollar, in which they get paid, is too low. “They get our oil and give us a worthless piece of paper,” Mahmoud Ahmadi-Nejad, Iran’s president, said, quoted by the FT “We all know that the US dollar has no economic value.”

That leave two bad paths for consuming countries. The first is that oil production is leveling off and the other is that OPEC thinks it is being stiffed based on the currency used to pay it for crude.

No wonder oil is back above $95 today.

Douglas A. McIntyre