Why We May Never See $80 Oil Again

I received an email a few nights ago from a coalition of airline companies with the tag line, "You can help keep travel affordable." Curious, I read on. The email began with the obvious conclusions: High oil prices exacerbate economic pain, and the airline industry is being suffocated by the continued rise in fuel cost. Fair enough. As I continued reading, the letter proclaimed in bold type:

Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Unfortunately for us, we are not sure who these "experts" really are. While I am certainly no expert either, I do understand basic economics, and to suggest that mere speculation could be inflating the price of oil by $60 a barrel is absurd.

While it's certainly true that Wall Street always loves too much of a good thing -- Internet stocks, securitizations, etc. -- which almost always leads to speculative bubbles, it's a fantasy to think that without "speculation," oil would be around $80 a barrel. The basic supply and demand laws suggest that we may never see $80 barrel oil again.

The Basic Economic Case

Let's step back and look at some various oil data provided by the Energy Administration Information.

The current worldwide consumption of crude oil is about 86 million barrels a day. Of this amount, the U.S. consumes about 21 million barrels a day with a population of 300 million people.

It appears that high gas prices are making a small dent in U.S. consumption, with the EIA predicting a consumption decline in the U.S. of around 500,000 barrels a day. This past July Fourth holiday weekend saw the least car traffic in a decade, so the basic laws of economics seem to be holding true.

Now onto China, a country with 1.3 billion people wanting to drive, eat, live and travel like Europeans and Americans. China currently consumes about 8 million barrels a day. It's obvious the direction Chinese oil consumption is heading.

To be fair, the Chinese government subsidizes gas prices, which are certainly having an effect on consumption levels. The long-term consequences of China's global might are clear: A nation with four times the population of the U.S. that consumes only half the amount of oil is likely to consume more oil over time. It's easy to draw a similar conclusion for the other emerging nations like India, Brazil and even Russia.