By Ryan McGreal
Published October 31, 2007
Reuters reported yesterday that oil futures hit $93.80 per barrel before settling at $93.53.
The spike was due to severe weather in the Gulf of Mexico forcing Pemex, Mexico's state-owned oil company, to shut down a fifth of its production.
We're rapidly approaching the point when the real (inflation adjusted) price of oil reaches an all time peak, higher even than oil prices at the height of the 1979 OPEC crisis.
So far, gasoline companies have been swallowing higher oil prices instead of passing them to customers in higher gas prices, but this can't continue indefinitely. According to CNN, many analysts expect oil prices will reach $100 per barrel by the end of the year, and gas prices will follow suit.
In fact, the remaining disagreement among energy analysts these days is when oil will pass $100 per barrel.
The problem is that after three years of flat supply amid rising demand, there's no spare capacity left in the system. As a result, every event that disrupts any oil supply send shock waves through markets and causes prices to spike.
In years previous, markets could absorb localized supply disruptions by diverting excess capacity from other regions. Today, as Daniel Yergin, the chairman of Cambridge Energy Associates, argues, the market "may be only one or two events away from" $100 per barrel oil.
This is consistent with the peak oil hypothesis, which also finds confirmation in oil production metrics for the past several years showing a peak in production in 2006.