Oilprices, How High will thery go?

Crude Oil Prices, How High will They Go?

The volatility of crude oil prices over the past 18 months has led to speculations that prices may
go much higher. Some energy analysts have forecasted that the price of crude could top $100 or
even $150 a barrel, from its current $47.00 level. The reason cited for this stratospheric increase
is the insatiable appetite of China, India and other countries, whose economies have entered a
stage of rapid economic growth, requiring increasing amounts of energy including oil. Their
expanding industrial sectors and greater ownership of private automobiles have given rise to the
assertions that with the limited worldwide supply, crude oil prices can only go up. Of course, one
must keep in mind that the increased consumption of these countries is on the top of our own
never-ending appetite for oil.

If the scenario outlined above were to actually play out, one implication would be that gasoline
prices at the pump would be in excess of six dollars per gallon. Possible? Yes, but highly
unlikely. Though short-term interruption in the supply of crude oil might occur, resulting in
temporary price spikes at the pump, the doomsday scenario is unlikely. One reason would be that
markets tend to be flexible and adjust to changing demand and supply conditions.

In a market system the prices of goods and services are determined by market forces. Provided,
of course, that the government permits price fluctuations. Prices established by the market send
informational signals to consumers and producers, who incorporate them in their respective
decisions. If the price of crude were to rise to the levels, suggested by the experts, less gasoline
and fewer oil products would be purchased. In that sense the market rations the available supply.
Perhaps, it would be painful in the short-run, but higher prices may be exactly what is needed to
develop substitute products to get the world away from its addiction and dependence on oil.

Clearly, if crude oil prices were to stay above $50.00 a barrel, for a prolonged period of time, or
go even higher toward $100.00 a barrel and beyond, a whole host of substitute commodities
would eventually become economical and compete with oil. If the industrial world were to
follow through with current experimentation and developments, the alternative energy supplies
would already greatly expand. These alternatives may include hydrogen, synthetic fuels from
coal, liquefied natural gas, electric cars and who knows what else higher prices may bring forth.
Higher prices might also result in new discoveries of oil, or the reworking of older wells.
Even though many experts argue that the least expensive oil has been found, no one seems to
know for certain. Another problem is that the public has heard similar predictions about the world
running out of oil before, going all the way back to the 1970s. In the meantime, we have
enjoyed a virtual glut of crude. As a result gasoline prices, adjusted for inflation, have barely
moved.

In this writer's opinion, OPEC and other oil producing countries do not want prices to go much
higher from their present levels, because of the potential competition from alternative energy
sources. They are well aware that losses of market share to crude oil alternatives would be impossible
to recover. From an investor's perspective, the conversion from crude oil to energy alternatives
would result in a host of investment opportunities because entirely new infrastructures would be
required. Thus, somewhat higher oil prices do have positive implications and may lead to entirely
new industries.