Back to the Future: $100 Oil May Return Soon

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Chris Graythen / Getty Images

An oil rig near the Deepwater Horizon wellhead in the Gulf of Mexico on April 28, 2010

Oil has been a slumbering giant for nearly a year, but experts say the world's most important commodity is set to resume its climb back to $100 by this summer at the latest.

If speculators — including investment banks and hedge funds — add fuel to the momentum as they did two years ago, when light crude topped out at $147, oil might trade at even higher highs around the time of the next U.S. presidential election. This could turn energy security into the top campaign issue, ahead of health care, financial reform and climate change.

The big reason for oil's expected jump is rising demand from developing countries, which are approaching the same torrid pace of expansion they enjoyed prior to the financial meltdown of 2008. "The Asian recovery is coming on fast, with China and India leading the way," says David Pumphrey, deputy director of the Energy and National Security Program at Washington's Center for Strategic and International Studies. In the case of China, the economic slack created by lower exports to the U.S. has been picked up by internal growth and trade with the rest of Asia as that country scrambles to raise the standard of living of a burgeoning middle class numbering in the hundreds of millions.

"The oil market is revving up again," says economist Peter Tertzakian of Calgary-based ARC Financial Corp., an energy-investment firm with a $2.8 billion asset portfolio. "It wants to go higher, but it's being held back."

By that he means that stagnant and declining demand for oil among the G-7 nations has created spare capacity of about 6 million bbl. per day, on top of the 86 million bbl. that are being consumed daily by the global economy. This temporary oversupply is also the result of heavy investment in new sources of oil by industry giants, including Exxon Mobil, Shell and British Petroleum, at the height of the last market bubble. BP's catastrophic oil-rig explosion off the coast of New Orleans has produced an environmental disaster, but the loss of an estimated 5,000 bbl. per day from the seabed should have little effect on global supply, as it is a tiny sliver of total output.

However, over the coming months, oil should begin to once again reflect the changing patterns of global demand. Consider that daily consumption of oil in the U.S. declined 5%, to 18.7 million bbl., over a 10-year period ending in 2009, according to the U.S. Energy Information Administration. By contrast, China's daily oil consumption increased 73%, to 8.2 million bbl., over the same period — and this trend shows no signs of slowing. The current margin of daily surplus capacity could quickly be taken up by higher demand from emerging markets, which would be reflected in prices.

This means that the price of gas at the pump is likely headed higher too. So far this year in the U.S., gasoline prices have stayed low relative to oil prices due to abundant supply. Gas producers are keeping their unit cost of refining down by running at full capacity and pushing product into the market despite lower consumer demand. An upward correction is expected in the months ahead, however, powered by summer driving demand and the rising price of oil.

Consumers could feel even more pain at the pump if oil speculators return to the market in a big way. Financial speculators added an estimated $20 to $40 to oil's $147 peak price, according to some industrial consumers. Though many of these players were driven off by the financial crisis, a rising oil price could draw them back. "Oil is a vital commodity we can't live without," says Tertzakian of ARC Financial. "That triggers a hoarding mentality when the world's economy is firing on all cylinders."