Why are Oil Prices So High "

Why are oil prices so high? This is the question being asked with increasing frequency in many countries around the world. Some would have you believe that the blame should be placed on "greedy oil companies", "Arabs", "speculators" or "OPEC".

While speculation is happening with investors and hedge funds looking to commodities for returns that are not being seen in the stock or property markets, there are underlying fundamental reasons which mean prices are likely to stay high.

Last November the International Energy Agency released its annual World Energy Outlook report. Traditionally the agency has projected energy supply based on projected demand.

The agency has projected that India and China will lead the increase in energy demand making 45% of total growth. Oil imports for these two countries combined will grow to 19.1m barrels a day by 2030 compared to 5.4m barrels a day in 2006.

Demand for oil will grow to 116m barrels a day by 2030, an increase of 37% on 2006 oil usage. In this report back in November the International Energy Agency warned the price of a barrel of oil could rise to $159 by 2030 due to high growth in demand. This estimate now looks very conservative.

The reality is there have been some fundamental changes.

Before if the United States went into recession, this would lower demand for oil and prices fell. Now with China, India and other rapidly developing nations demanding ever increasing quantities of oil a recession in America is unlikely to lead to falling oil prices like it did in the past. Were per capita oil use in China and India to reach the same level as in the United States, this would fully deplete the world's remaining proven oil reserves in just 15 years and prospective resources, in 26 years.

The other fundamental change is that there is little excess production capacity. While Saudi Arabia would like the world to think it could increase production if it deemed it "beneficial" to the stability of the market, this is just an illusion of control. The reality of the OPEC cartel is that while sticking to production quotas may have benefited the group as a whole, individual countries have always "cheated" consistently and repeatedly exceeded their production quotas. In the past this has lead to significant downward pressure on prices.

This time the signs are that the world is at or near its maximum oil production capacity. Does this mean Peak Oil has arrived? In my opinion - not yet.

New production will continue to come online in the coming years which is likely to raise worldwide maximum  oil production. So we haven't reached peak production... yet.

What we may be experiencing is what Robert Rapier calls Peak Oil Lite, with the early effects of Peak Oilarriving. Demand is rising faster than supply. In its July 2007 report the International Energy Agency predicts OPEC spare capacity will decline to minimal levels by 2012. The lack of spare capacity means, that price volatility increases with price spikes occurring in the event of supply disruption.

So what we are likely to experience prior to Peak Oil is Peak Export. According to Eugene Linden in BusinessWeek when it comes to oil our biggest concern should be the amount of "global oil available for export".

According to the Export Land Model developed by Jeffrey Brown - exports decline faster than production declines, the rate at which exports decline accelerates over time and only a small percentage of a producing country's production is exported following peak production.