Oil’s Next Stop: $150

Legions of analysts said that oil would never touch $100. OPEC would lift supply. A slowing economy would cut demand in China and the US. Political problems in Nigeria, the Middle East, and Venezuela were overblown. The hurricane season was even mild.

None of that turned out to be right. Now that oil is at $100, the factors are in place to take it higher, perhaps as high as $150 by the end of 2008.

For starters, OPEC has not shown any indication that it is willing to increase supply, at least not by any meaningful amount. And, why should it? With demand tight, oil-rich countries are bringing in money at a rate beyond the fondest dreams. A higher supply rate only brings that yield down.

Unstable geo-political activity frightens the market more than pundits believed it could. The site of soldiers in the streets, assassinations, and burning buildings may be bolstering the view that an "explosion" in a big oil producing country could bring a large interruption to supply.

Oil is also becoming more scarce for the likes of the US and China because exporters are using more crude at home. A trip to Mexico City easily demonstrates that. Cars are everywhere and so is the construction of new infrastructure. The same thing is going on in the Middle East and Africa. These countries plan to keep more and more of their own oil production.

Demand in the US and China is not falling. In the US, the consumer appears willing to put more and more of his income into fueling his car and heating his home. No one has come up with a credible reason for these actions. Citizens here simply want to drive and be warm.

China’s energy industry is a fixed game where the central government is willing to spend billions of dollars to buy crude and run it through its state-owned oil companies. At the other end of that process, the diesel and gas prices are well below market. China needs to have inexpensive fuel to drive its GDP growth. If gas prices there are at $4, the transportation industry would grind to a halt.

The oil picture will get worse. There are, in fact, no reasons for it to get better.

Douglas A. McIntyre