An excellent analysis of how we got to $100 oil on the website of Cambridge Energy Research Associates raises the question of how much higher prices can go, but does not answer it.
The piece appears to suggest that the “break point” for oil prices, as illustrated in figure 6 with some cute little blue figures, is about $120. At that point, factors such as the rise of energy efficiency, alternative fuels and other policy changes, as well as the economic impact, really begin to take their toll on demand.
As CERA points out, however, the average price for WTI over 2007 was a “mere” $72 a barrel; $100-plus sustained for a year or more would do much more damage to the world economy than anything we have seen so far. The break point may well turn out to be pretty close to where we are now.
Opec’s efforts to defend $100 notwithstanding, I think a slowing world economy still means we are likely to see oil lower at the end of 2008 than at the beginning.