With oil at $100 barrel — and OPEC denying that the price is a result of supply problems — projections on where the cost of oil will go and why abound.
Most analysts don’t expect the price of crude to drop anytime soon.
Not to worry, though. Algerian Energy Minister and OPEC president Chakib Khelil says that given the high demand and higher production costs the price of oil is not necessarily very high.
"The surge in price will probably go on until the end of the first quarter of 2008, before stabilizing during the second quarter,” Khelil told reporters this week.
Others insist that oil is still actually remarkably cheap. "One hundred dollars a barrel is actually 14.9 cents a cup,” Matthew R. Simmons, chairman of investment bank Simmons & Co. International told Bloomberg.
Demand, and speculation on that demand, continues to be the order of the day. Contracts to buy oil at $200 a barrel on the New York Mercantile Exchange recently jumped to 5,533, a record tenfold increase in just two months.
University of California professor and oil shock expert James Hamilton notes that between 1985 and 2003 the dollar value of oil consumption was equivalent to 2 percent or less of national income, historically low.
At $100 a barrel for a year, oil would consume about 5 percent of GDP.
At $150 a barrel, a little over 8 percent, crude is as much of the overall economy as it ever has been in the past, but still within historical limits.
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Energy expert Claudia Kemfert of the DIW German Institute for Economic Research says that 20 percent of increased oil costs are a result of speculation. She also foresees price increases to $150 per barrel in five years and $200 in 10 years – if oil supply dwindles.
Paul Horsnell, head of commodities research at Barclays Capital, says price increases now also reflect concern that supply capacity investment needs higher prices to keep up with demand growth. Barclays expects oil will average $87.40 a barrel in 2008, 21 percent higher than last year.
Meanwhile, cable TV stock guru Jim Cramer sees oil going to $125 a barrel. "We are running out of oil more quickly than people can imagine, and that means great returns for oil companies,” Cramer says. "Just buy the stock of the company you filled up at today then sit back and make money.”
Maybe, maybe not. Some industry analysts project a lower – not higher – oil price.
Certainly, $200 a barrel is out of the question in a slowing U.S. economy, according to 27 analysts surveyed by Bloomberg.
Their median forecast is that oil prices will average $78 a barrel this year, 20 percent below the current level, and $75 in the fourth quarter—the steepest decline since 2001, when prices tumbled 26 percent.
Driven in part by seven straight weeks of shrinking U.S. crude supplies, rising prices have unleashed forces that within the next two or three years will bring oil prices tumbling back down to below $50 a barrel, predicts investment analyst John Cassidy.
A chance to buy "$1.50-a-gallon gas might not be gone forever,” he says. "Don’t trade your Escalade for a Prius just yet.”
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