Oil Threatens $110/Barrel Level Again (XOM, CVX, BP)

Momentum is building for oil prices to breach the $100/barrel level again. The black stuff has gained nearly 9% in December, and a total of 15% for 2010. This is good news for the oil majors, but much less so for the global economy. Companies like Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), BP plc (NYSE: BP), and others can anticipate higher profits as the price of a barrel rises because their costs are pretty well set and won’t rise as fast as the price they’ll get for their oil.

Even China, the leader in increasing demand for crude, won’t feel much of a pinch as prices rise because the price of crude in renminbi is still 40% below the all-time high reached in July 2008, according to the Financial Times.  Other emerging economies could also be insulated from the rising price of crude, which will keep demand up and support prices that will take a toll on the economies of Europe, the US, and other parts of the globe.

For example, in Bolivia, President Evo Morales had to cave in to demands to continue the country’s fuel subsidy after trade unions demonstrated against his plan to eliminate the subsidies and double the country’s gasoline price. The country’s economy is expected to grow at a rate of 5% in 2011, but about a third of that will now be spent to continue the gasoline subsidy.

Another consideration is crude supply. Both the US Energy Information Administration and the International Energy Agency now count natural gas liquids and other liquid hydrocarbons in the total amount of crude supply. This practice hides the fact that actual crude production is falling, particularly the Mexican part of the Gulf and in the North Sea. The addition of these liquids keeps the barrel count high, but the liquids can’t be refined into gasoline. Instead they are used to provide products like propane and butane with lower energy content.

That’s not necessarily a bad thing because it leaves more crude to be refined into gasoline, but if demand growth in China is based on getting more crude to produce gasoline for all the new cars in the country, non-crude liquids don’t fill the bill. The country needs crude, and the more it needs, the higher the price will go because there is simply less of it.

Does that mean that we’ll soon be seeing $100/barrel crude again? If bullish economic forecasts for the global economy are realized, then $100/barrel oil could easily be in our future. Growing economies need energy, and while oil supplies are probably sufficient in physical barrels, speculative barrels are likely to be in much higher demand.

It also seems likely that the world economy can’t support crude prices at that level for any extended period. Every extra dollar that goes into paying for crude dims the positive outlook for economic growth. So, while oil could rise to the $100/barrel level, it probably won’t be able to stay there for long.

Paul Ausick