As oil passes $100, the question: will it stop?

If the global economy slows, oil prices will fall. But probably not until after March.

from the January 4, 2008 edition

Page 2 of 2

Page 1 | 2

Aren't the Saudis boosting output to lower prices? Is manipulating the spigot still an option in a world where China and India are demanding much more fossil fuel?

The short answer to the first question is no. While Saudi Arabia is adding new production capacity, it, along with the rest of OPEC, declined to boost its output quotas in December, precisely because of expressed worries about a slowing economy. In theory, the Saudi government has 2 million barrels a day of spare capacity – equal to the International Energy Agency's prediction of demand growth in 2008 – but the country has not yet committed to releasing more of this to the market.

Over the next five years OPEC's members are hoping to add another 12 million barrels a day of capacity. But whether that will keep pace with the rising demand from India and China, is hard to gauge. Mr. Gheit says OPEC production increases aren't needed for prices to come down. "The market is adequately supplied. It will come down.... There have been and always will be commodity cycles."

When will fossil fuel alternatives start to reduce demand for oil (and lower prices)?

Not for a long time, according to estimates by the UN and economists who track energy trends. The problem is that none of the alternatives like wind power and solar energy can yet meet anything near the energy demands of a growing world, and they remain more expensive than both oil and coal.

For instance, US Department of Energy statistics estimate that only 6 percent of US energy consumption now comes from renewable sources. A recent report from the International Energy Agency estimates that global energy demand will rise by 50 percent in the next two decades, driven by the Chinese and Indian economies, and that fossil fuels will provide 84 percent of this. Technological breakthroughs could change this picture, but none are yet on the horizon.

If oil goes to $200, what does that mean for US gasoline prices (i.e., how closely tied are US gasoline prices to oil prices)?

US gasoline prices have held fairly steady since the middle of the year, at about $3 a gallon, even as crude oil prices have marched higher, but ultimately the price of crude is the most important determinant in the price of gasoline. A general rule of thumb for gas prices is that for each $1 that's added to the price of crude, gasoline prices will rise about 2.5 cents per gallon. So if the price of crude rose to $200, from $100 today, average gasoline prices in the US would rise from about $3 to about $5.50 a gallon.

1 | Page 2