Oil Posts An All-Time Annual High

Brent crude prices will average over $110 a barrel in 2011. Reuters reports that will beat the 2008 record of approximately $100. It is difficult to say how to take the news.

The causes of high oil prices are fairly obvious, but don’t tell the full story. Demand is higher in the US and China because of an economic recovery. But, the US recovery has been very weak. And, much of the EU has fallen into recession which should offset China demand.

Another reason given for high price is that much of Iraq’s production was shut down because of civil war. And, Iran has threatened to cut oil supplies completely. These problems are offset by the fact that Saudi Arabia has said that it would make up any cut in production from Iraq and has hinted the same about Iran. The problems are further offset by the fact that oil producing nations outside OPEC, like Canada, continue to have healthy production levels.

Finally, oil sands supply has started to come online. The source was considered unprofitable just two years ago. Technology for exploration and production was in early stages. Oil prices were low enough then that it was unlikely oil sands product could be profitable. Both of those things have changed.

All in all, it appears that prices should drop into next year. Much of the turmoil in the Middle East has settled–at least in nations which are large exporters. Oil sands is a huge new source of supply. An economic slowdown in Europe has spread and will continue to. The ripple effects of that will reach the US and Chinese economies.

Low oil prices in 2012 may look attractive as first, economically speaking. However, that view does not look beneath the surface of what robust demand and high prices mean.

Douglas A. McIntyre