THE BLOG
12/07/2010 09:11 pm ET | Updated May 25, 2011

Triple-Digit Oil Prices Back Within a Quarter

The strongest manufacturing numbers coming out of the Chinese economy in a seven-month period, coupled with plunging oil inventories in the world's largest energy consuming economy, have sent oil prices to a 25-month high. With no let-up in China's fuel demand, the world should be looking at triple-digit oil prices again within a quarter.

That may come as a shock to those who thought the bloated oil inventories that came in the wake of the last recession would provide a buffer against future oil price spikes. Suddenly that buffer has literally gone up in smoke.

Refined oil stocks held by China's two largest oil companies have fallen for eight consecutive months, while diesel stocks in the country fell 14 per cent in October. And the tightening oil market won't just be felt in China. The 140 million barrels of international oil inventory sloshing around in floating storage on the high seas is also all but gone.

With oil prices within striking distance of triple-digit levels, don't look for any price relief at the upcoming OPEC meeting in Ecuador. Venezuelan energy and oil minister Rafael Ramirez was recently quoted as saying that $100 per barrel was a fair price for both consumers and producers. (But not for cab drivers in Caracas, who will continue to be able to purchase their fuel at 20 cents per gallon, the equivalent of a little over $8 per barrel). Meanwhile, King Abdullah of Saudi Arabia has already served notice that, without triple-digit prices, there is little incentive for new oil exploration in his kingdom.

In other words, without the return of the kinds of oil prices that put the world economy into the deepest ever post-war recession, we shouldn't expect major oil producing countries to find and develop new supply. Yet according to the recently released World Energy Outlook from the International Energy Agency (IEA), world oil demand has never been more dependent on finding new supply.

How the goal posts have moved when it comes to oil prices and supply forecasts. Just as the IEA has finally recognized the reality of peak oil--at least insofar as affordable conventional oil is concerned--triple-digit oil prices have become the new normal in OPEC's price expectations.

When both OPEC, an organization representing 40 per cent of world oil production, and the IEA, representing countries that consume roughly 50 per cent of the world's oil, both now acknowledge the imminent return of triple-digit oil prices, perhaps it's time our policy-makers should as well.

Our last encounter with those prices was brief but decisive. Oil demand collapsed, and, since oil powers our economy, so did GDP. What steps we have taken to ensure the same thing doesn't happen again is far from clear.