Triple-digit Oil Is Inevitable

MarketWatch
July 11, 2006

NEW YORK (MarketWatch) -- Oil at $100 a barrel? Oh yes, and like most milestones, this is one that you are not likely to forget.

As we stand on the precipice of such lofty prices, I understand that there are those who believe that $100 oil is pure nonsense.

We've been watching oil very closely. At $40 we said crude would hit $60. At $50 we said it would hit $75 within a year. Some scoffed and called me a fear monger. Now that we're at $75, I'm telling you that under the right conditions oil could not only hit, but sustain a $95 to $110 price per barrel by the end of the year. I say it's not only likely, but almost inevitable within 12 months.

Now before I get flooded with e-mail from those who believe oil is going back down to $35, let me lay out my case before you hit the send button.

Fill 'er up for a trip down memory lane

In 1967, the year of my birth, gasoline was around 33 cents a gallon. I was reminded of this when a friend sent me a birthday card that tells you how much stuff cost when you were born: A bar of soap was 2 cents, a movie was 60 cents, and you could buy a three-bedroom house for $16,000. It was the most depressing card I have ever gotten -- and it was an eye opener too. Prices climb, that's what they do. And nothing climbs faster than a finite commodity that is in low or declining supply and in growing and high demand.

Crude oil is exactly that commodity. It's in high demand all over the world and shows no sign of slowing, even with prices at $75. Complaining yes; slowing of usage, no.

Crude oil, at least the cheap and easy to get to stuff, is dwindling. What's left are things like oil sands that are costly to refine, sour crude that also requires additional refining, deep-water drilling and other less than desirable and more difficult methods. Most of all these things cost more money and that cost is passed right along to you and me.

The usual suspects

Now I'm not breaking any new ground here, many people have written articles on why $100 crude oil will be with us soon. I wrote on it in an article for MarketWatch in February, when crude was $60. See story.

Crude is now hovering around $75. A one two punch of terrorism on oil facilities along with a bad hurricane season or severe damage to the Houston ship channel and a spike to $100 is very well within reach.

Geopolitical wrangling, such as is taking place with North Korea, Venezuela, Nigeria and Iran all raise the eyebrows of traders who are concerned that any and all these events could impact the already fragile oil supply.

Is it really that hard to believe? Oil reached nearly $75 per barrel without a catastrophic supply event. Compare that with the previous price spike in the second half of last year, which was sparked by the Gulf hurricane season.

Truthfully, physical supply of oil isn't a factor for traders right now, or at least not a primary one. Fear is the biggest factor and perception of what "could" happen. Any actual disruption will build on the base of fear that's already been created.

Given current supplies, the reality of $100 oil may be hard to swallow but this is a free and open market and prices are set by what people are willing to pay. Do not discount sentiment and please, don't blame the messenger.