How High Can Oil Prices Go?

Brittney Barrett |

Despite suspicions that the decline in oil demand from Japan would help keep the price of oil from exceeding its already inflated rate, per barrel numbers continued to climb with investor concern over the ongoing civil unrest in Libya and Yemen on Wednesday. U.S. oil prices have surged upwards of 20% since mid-February, when the civil unrest in Libya became pronounced.

Oil demand from Japan has fallen by as much as 1 million barrels per day; however, many investors are under the impression that decline is not enough to counteract the potential production limits caused by the unrest across the Middle East and Africa, continuing to send prices higher.

A report released early Wednesday morning from the Energy Information Administration showed inventories of crude oil rising 2.1 million barrels last week while gasoline stockpiles declined by a surprising 5.3 million barrels, exceeding expectation.

The benchmark U.S. contract, West Texas Intermediate climbed 92 cents, or 0.9%, to $105.89 a barrel for April delivery in the aftermath. Crude for May, the new front-month contract rose 83 cents, or 0.6%, to $105.82 a barrel on the New York Mercantile Exchange following the inventory report.

Brent oil, the benchmark European contract, fell 5 cents to trade at $115.65 a barrel.

The rising oil prices that have accompanied the conflict have been the subject of concern for many economists, who predict persistently high prices may result in a double-dip for the still-weakened economy. People and businesses spending a larger percentage of income and profits on energy mean less consumer spending which would inherently curb growth.

Now, with the U.S. and other nations taking action in Libya and the civil unrest at its worst levels, reasons for concern exist. At the start of the fighting there was little supply affect but now with sanctions on Libyan oil companies imparted by the U.S. government and other oil related obstacles, prices continued to rise and supply remains in question.

Simultaneously, with the dangers of nuclear power aptly illuminated by the Japanese crisis, alternative methods for energy are suffering from declining appeal. The combination of these factors is pushing oil prices up with several partial solutions in sight, but not yet pursued.

Off-shore and domestic drilling, a move that would weaken our ties and reliance on foreign oil from the conflict-ridden Middle East is often discussed as a potential solution to climbing prices. It’s move that would ward off the double dip in two ways, by creating U.S. jobs and domestic profits and by shaking loose the shackles of oil in the Middle East.

Alaskan Senator, Lisa Murkowski is among a number of politicians pushing for greater domestic drilling, a campaign that's victories so far include just two off-shore drilling permits granted to BP in recent weeks.  According to Murkowski, who may or may not be taken as seriously as a consequence of her political likeness to another Republican from Alaska who coined the phrase “drill baby drill,” this is a considerable failure on the part of the government.

“The worst part of this emerging crisis is that our own government deserves much of the blame. International events have pushed prices higher, but our own short-sightedness and restrictions have also played a critical role," she said.

The lack of a coherent energy policy has been a gripe among many politicians, increasingly on both sides. While the oil situation has been provoked considerable geo-political difficulties in the past the recent oil price spike, especially in the delicate economy is especially dangerous.  Experts predict oil prices to reach as high at $5 per gallon by Memorial Day, a statistic that would have a highly detrimental effect on domestic tourism, preventing summer road trips and challenging what is commonly called “the driving season.” In the past, oil prices have ebbed and flowed and what came up, usually came down at least somewhat. But with little idea of what type of political system is going to come out of the Libyan conflict and when the civil unrest will desist, predictions in this instance may be hard to come by. How long can our still recession weakened economy handle the oil price incline before it can't anymore?

 

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
HLM.P Hillman Group Capital Trust Preferred Stock 32.84 -0.03 -0.09 4,968

Comments

Emerging Growth

Nano One Materials Corp.

Nano One Materials Corp is a technology company. The Company manufactures storage materials for lithium ion batteries.

Private Markets

Pinterest

Pinterest is a visual discovery and planning tool. Users ("Pinners") use the site and apps to get ideas for their future, such as recipes, places to travel, and products to…

Dropbox, Inc.

Dropbox is a service that allows their users to bring all photos, docs, and videos anywhere, and share them easily. Any file saved to Dropbox will automatically save to all…