Is $100 Oil Right Around the Corner?

Thanks to the growing world economy, the demand for crude oil has jumped significantly over the last several years.  Because the growth of supply hasn’t increased at the same pace (some would argue output has actually decreased) we’ve seen oil jump from the low $20s five years ago to over $80 per barrel as of last week.

So what does that mean going forward?  If you go by what a majority of people think, we could be headed towards triple digit oil prices within the next few months.

According to a recent poll on Daily Fuel Economy Tip, 55% of respondents stated that they believed oil prices would hit $100 per barrel by the end of 2007; 39% of respondents said they didn’t think we’d hit $100 during 2007; and 6% of respondents said they were unsure if oil prices would get to the century mark.

It seems there are three main items that will determine whether or not oil prices will hit $100 within the next three months:

1. Speculators
2. Growing demand
3. The falling dollar

It is widely debated whether or not the fundamentals exist for $100 oil.  A large reason why the fundamentals are unknown is because there has been so much speculative investing by people who are simply looking to make a quick buck and have no intention of holding the end product.  These oil investors are essentially buying in, driving the price higher and selling quickly to make money on their position.  Think of the housing market and property flippers.

That being said, the price of oil coul very easily be going up based on fundamentals alone.  The world needs more and more oil each day to continue economic expansion.  With supplies stagnant (at best) the simple concept of supply and demand seems to dictate higher prices with each passing day.  Whether or not we get 25% price appreciation over the next three months remains to be seen.

Finally, the biggest variable in $100 oil is the falling value of the dollar.  Oil is a commodity that is priced in dollars, so as the value of the dollar falls, in order to maintain “value stability” the price of oil must make an appropriate upwards adjustment.

For example, lets say the value of a dollar equals 100 and the price of oil equals 50.  If there’s a 10% depreciation in the dollar, there needs to be a 10% appreciation in the price of oil just to maintain equal “value.”  Since the dollar shows no signs of strengthening, this will oil push oil prices higher in the near term.

Whether or not we hit $100 in 2007, it’s an absolute certainty that the scenario is not too far off.  Just ask T. Boone Pickens.