Oil prices are going up and will keep going up. Estimates of global demand for this year and next have been ratcheted up as the global economy continues to gain momentum and developing countries continue to emerge toward developed country status. (Just wait until there's a car in 1.25 billion Chinese garages!) Supply on the other hand will be constrained. Brent and some other classes of crude are already trading over $100/barrel. Because of one-off anomalies and the pipeline configuration in the US, crude supplies are building up at the Cushing, OK terminals to such a degree that West Texas Intermediate (WTI, which is based on prices at Cushing, trades around eight dollars cheaper than Brent. But this aberration will not last forever and the price differential between Brent and WTI will collapse as, more than likely, WTI moves more in line with Brent, which will continue to climb.
Meanwhile, new supply is limited as reserves shrink. Exxon announced last week that it has only been able to develop enough new reserves to make up for about 80% of last year's production. In years past Exxon was able to increase reserves by more than enough to make up for production. New drilling in the Gulf and the Artic has been shut down by the Feds. More oil is under the control of governments around the world than ever before, and these governments are run by guys like Putin, Chavez, and that wacko in Iran who want to see prices move substantially higher. Global excess capacity continues to move towards the single digits, most of that being in Saudi Arabia. Some new reserves have been discovered,like the huge find offshore in Brazil, but on a global basis the Hubbert Oil Peak theory seems to be finding proof.
In other words, we're fucked. The only thing that might save us is if oil prices rise enough to justify greater oil sands development in Canada, where reserves almost match those of Saudi Arabia. Or maybe Boone Pickens' dream of a vehicle that runs on natural gas might become a reality. (One of the great, encouraging stories in this new century has been the new technology that enables drillers to get natural gas out of shale deposits, enough of which lies in the US to meet our nat gas needs for a century or longer.)
But getting oil out of oil sands is expensive and complex, and a natural gas auto can't seem to get off the drawing board. So expect gas prices to continue to rise along with oil prices over the next couple of years. Here in Connecticut, gas is going for around $3.50/gallon. It costs me almost $70 to fill my tank. What's the nation's mood going to be like if oil gets back to $140/barrel and gas to $4/gallon or even higher over the next year or two?
I had dinner the other night with a couple of my Democratic pals. They were still licking their wounds over the November mid-terms but expressed supreme confidence that Obama would get re-elected in 2012. No way he's going to lose, they said. Most pundits believe that if unemployment gets down to low 8% area, Obama will win. But I think the bigger joker wild for the 2012 elections will be the price of oil and gasoline. If gas gets up above $4 again, the populace will be in a foul mood, no matter how much lower the unemployment rate is. I think $4 is certainly in the cards and $5 or higher not out of the question.
And it's going to be so easy to point to Obamas's policies as being a major contributor to high gas prices. Ever since the BP explosion, his administration has not issued new leases for drilling in the Gulf. Although last Spring he was moving toward allowing drilling in the eastern Gulf of Mexico and on the outer shelf along the mid-Atlantic states, he flipped on that after the BP spill. Enormous prospects for oil exist in the Artic and off the Alaska coast, but Obama's militant EPA recently shocked the oil industry by taking back a permit that Shell had obtained from the EPA to begin drilling on a lease that it has spent over $3 billion developing. Such a remand of a previouly issued drilling permit has heretofore never happened. Can you imagine the field day Republicans are going to have painting Obama and his administration as out-of-touch environmental elitists who don't understand the hardship that four dollar gasoline inflicts on the average citizen? Repubs are going to take Rahm Emanuel up on his dictum to never let a crisis go to waste and play this one to the hilt.
Prepare yourself to be hearing a lot about the "Obama Energy Crisis" of 2012.