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Oil at $200 a barrel


Oil's meteoric rise to near $120 a barrel looks like more than just another economic bubble — growing demand and tighter supplies are likely to keep prices high. Some analysts say even $200 a barrel would not be out of the question.

The latest price surge — pushing crude to record heights in recent weeks, and to nearly double its level a year ago — has some key components of a classic bubble, when market prices climb far above their intrinsic value. The burst comes when investors realize the assets are overvalued.

Oil prices fell more than $3 a barrel on Tuesday, to just less than $116, as the market absorbed data showing demand is falling even as supplies are rising.

But growing worldwide thirst for crude, in large part from the rapidly developing economies of China and India, means frustrated consumers probably won't get relief. Gas prices inched higher at the pump on Tuesday, continuing their record-breaking press toward $4 a gallon. The national average price of a gallon of unleaded gas rose to a record $3.607, according to a survey of stations by AAA and the Oil Price Information Service.

"We can do our homework, but prices are going to go where they want to go at this point," said Jeff Spittel, an analyst at investment bank Natixis Bleichroeder Inc.

Americans who hoped to ride out temporarily high prices by carpooling or driving less may have to make those habits permanent. And because of the premium prices, oil companies may be willing to search out more oil in places they previously couldn't afford to explore.

The Organization of Petroleum Exporting Countries — which supplies about 40 percent of the world's crude — insists it's supplying more than enough oil.

Instead, many observers blame speculative traders for bidding up the price as a hedge against inflation and as protection from the sinking U.S. dollar. Some see that as evidence of a bubble.

It's also becoming harder and more expensive for oil companies to find and tap new petroleum reserves — a troublesome scenario given forecasts that the world's energy needs will escalate by more than 50 percent in the next two decades.

Toss in the weak dollar and political instability in some oil-producing countries, and it seems unlikely that oil will fall below $100 a barrel anytime soon, if ever.

Widely watched oil price prognosticator Goldman Sachs has said oil could average $110 a barrel by 2010, up from a previous forecast of $80, and that a spike as high as $200 a barrel is possible.

Supply is at the heart of soaring prices, said John Moroney, a Texas A&M economics professor who just finished a book on energy production and consumption. He cites production declines in Mexico, an unstable industry in Venezuela and possible shrinking Mideast production capacity.

"I don't buy the bubble theory," he said.

Many analysts believe the weakness of the dollar is a bigger factor than supply and demand because the soft dollar draws investors worried about inflation into commodities such as oil and gold.

Some market-watchers say oil will probably keep rising until demand falls off, which they describe as the market's way of finding fair value. For oil, some estimate that price as low as $60 or $70 a barrel.

So if there's any good news, it's that U.S. demand has begun to wane, with fuel prices causing turmoil in an economy saddled with recession fears, a housing and credit crisis, and dismal retail sales.

Oil at $200 a barrel 04/29/08 [Last modified: Tuesday, April 29, 2008 10:41pm]
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