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High Oil Prices are Here to Stay

Written By Brian Hicks

Posted April 21, 2008






If you are waiting for the price of oil to come down any time soon, your patience is likely to be sorely tested.

That’s because even if the U.S. economy descends into a protracted recession, the rest of world is as thirsty for oil as it ever was—and then some.

That, of course, includes the 2.48 billion people in China and India that are yearning to put the top down and head out on to the open road.

The result, according to the International Energy Agency (IAE) is that oil demand will increase by 2% this year no matter what happens in the states.

So while oil at $117 may make you wince in pain, just imagine what it’ll be like when crude hits $150.

Here’s the story from Bloomberg by Mark Shenk entitled: Emerging market Use Exceeds U.S. as Prices Rise

"Traffic jams in Beijing and humming air conditioners in Dubai are replacing U.S. highways and suburbs as the driver of global oil prices.

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris. U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

Economic growth of more than 8 percent in China and India, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for falling U.S. demand. Oil use worldwide will increase 2 percent this year because of growth in emerging markets, the Paris-based IEA says.

“Does the U.S. matter anymore?” said Mike Wittner, head of oil research at Societe Generale SA in London. “Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East.”

CIBC World Markets, Societe Generale and Barclays Plc say oil prices are heading higher because of increasing fuel consumption in emerging markets, regardless of a U.S. downturn.

“The U.S. recession will be a footnote as far as the oil market is concerned,” says Jeffrey Rubin, chief economist at CIBC World Markets Inc. in Toronto, who has correctly forecast higher oil prices since 2000. “Supply isn’t growing and demand is growing robustly in the developing world.”

Oil will average $120 a barrel for all of 2008, compared with almost $98 in the first quarter of the year, and reach $150 “by the end of the decade,” Rubin said.

(Emphasis mine)

U.S. pump prices have followed crude oil higher. Regular gasoline, averaged nationwide, rose 2.7 cents to a record $3.445 on April 18, according to AAA, the nation’s largest motorist organization. In the U.K. a gallon of gasoline cost $7.99 on average on March 31, according the Automotive Association.

“Even if the fundamentals in general, particularly this quarter, were to weaken, we would think investment flow could be pushing prices to records anyway,” Wittner said.

Investors have transferred money into commodities, especially energy, during the past year because their returns have outpaced stocks and bonds. Oil gained 22 percent, while the S&P 500 slid 5.6 percent and government bonds returned 12 percent, according to Merrill Lynch & Co. indexes.

Investments tied to commodity indexes rose as much as $4 billion in the first quarter, a third more than in the final three months of last year, Standard & Poor’s said April 18.

‘It makes sense for investors and hedge funds to invest in these commodities with the weakness of other markets,’ said Eric Wittenauer, an energy analyst at Wachovia Securities in St. Louis."


That’s consistent with what billionaire George Soros said last week when he forecast that the boom in commodities is still in a "growth phase" after oil, wheat and gold rose to record heights.

“You have a generalized commodity bubble due to commodities having become an asset class that institutions use to an increasing extent,” Soros said last week at an event sponsored by the Centre for European Policy Studies in Brussels. “On top of that you have specific factors that create the relative shortage of oil and, now, also food.”

So here’s the deal.

It’s not some grand conspiracy that has oil well over the $100 mark, it is as simple the law of supply and demand. A weaker dollar by the way certainly doesn’t help matters either.

So if you’re waiting for oil to drop back to $80 in the near future, you might as well be sitting be out there with Linus on Halloween waiting for the Great Pumpkin to arrive.

It just isn’t going to happen anytime soon.

Here, by the way, is a great story on the growth of  the Chinese auto market. It’s entitled: Gas guzzlers a hit in China, where car sales are booming