Oil Barrel Price

Where are oil prices headed?
 

Quite a while ago I predicted that crude oil prices would top $130 per barrel in 2008. My forecasts were correct. Crude oil topped around $147 per barrel a few short weeks ago. Since that time, the price has fallen dramatically to around $113 per barrel as of the day this is written (mid August 2008).

Are prices going to stabilize here? Will prices fall further, or is this just a temporary correction in an ongoing trend of ever increasing oil prices?

My opinion is the latter.

Here are some facts:

1. Production at Mexico's giant Cantarell oil field is falling dramatically. Crude output from Cantarell, the world's third-largest oil field, is falling at the fastest pace in 12 years — down a stunning 34% in May, 2008 from a year earlier, or a loss of more than 540,000 barrels a day.

I had originally thought that Mexico's oil exports could halt by the end of 2010. It seems that I was too optimistic. Recent reports are that Mexico’s internal demand coupled with the shrinking supply are creating the conditions for Mexico to switch from being a net exporter to a net importer much sooner than 2010.

Naturally, falling production is curbing exports to the U.S., which buys about 80% of Mexico's oil exports. Sales to the U.S. tumbled to 1.07 million barrels per day in May, 2008 from 1.4 million barrels per day in September, 2007.

2. World demand is growing rapidly. Here’s a fact that you probably were not aware of: the United States actually exported more than 300 million barrels of oil last year. Given the political talk about decreasing our dependency on foreign oil, it's an oddity, indeed, that the oil companies would be selling domestically refined gasoline, diesel fuel and other products overseas. Why not just sell it domestically? Answer: because other countries are willing to pay, it's as simple as that.

Half the world’s population is now emerging out of their poverty onto a plain where they need oil just as much as the developed world. $2,500 cars are now becoming available in China and India and the rest of Asia. More than 20,000 new cars per day are being sold to Chinese citizens who have never owned an automobile before. This is new demand being created for gasoline. China now has a middle class estimated at nearly 300 million people. That is a far greater number than the middle class in the United States.

Let’s look back in time to get a better idea of where China is at in terms of number of automobiles and demand for gasoline. The year was 1915 and a young and growing America was just beginning to fall in love with the automobile. That year there were 9 privately owned vehicles per 1,000 Americans. That is precisely where we find China today as it begins its own love affair with the automobile. With a middle class that is larger in number than that of America, can you see how much growth there will be for gasoline demand in China in the coming years?

China has already passed Japan as the second largest automobile market after the US. Astoundingly, China did not even begin encouraging private car ownership until 1994. Even more amazing, 37% of people driving in China today did not know how to drive 3 years ago! That is a glaring example of how fast demand for autos in China is exploding.

As the banking and financial system grows and gains acceptance in China, it will open up more opportunities for Chinese citizens to buy cars on credit. In a Chinese car ownership survey, a whopping 96% of respondents said they paid cash for their cars. As this nation of hardworking people begins to taste the convenience and freedom of automobile ownership, there will be no turning back, even at higher fuel prices. The global demand for gasoline will grow rapidly as car ownership becomes more and more commonplace in China.

It is only a matter of time before China will have more cars than any country on the planet. On the luxury side, China is already the #1 Rolls Royce market in the world, with the most popular model selling for a cool $397,000.

China, India, and the Middle East are among the fastest growing economies in the world. They have accounted for nearly two-thirds of the rise in world oil consumption since 2004. However, these economies still consume a relatively small amount of oil on a per capita basis. In the coming years, as China’s demand for gasoline grows to the point that it exceeds that of the United States, those people who are looking for the good old days of low gasoline prices will be sadly disappointed.

Other factors that could cause the oil price to rise include the recent military actions in the country of Georgia, tensions with Iran, and the sinking value of the dollar on the world currency market (despite its recent bounce, the value of the dollar remains in a multi-year downtrend.) Even without these factors taken into consideration, it is not hard to imagine oil prices topping their recent record of $147 per barrel.

It could even happen before Christmas.