Oil prices were flirting with $120 per barrel early this week and several prominent analysts released forecasts last week predicting a barrel could cost $150 this summer.
CIBC World Markets analyst Jeff Rubin said last week that oil prices might reach more than $200 by 2012.
If true, that will increase worries about inflation, particularly food price inflation because energy prices are a key part of food production costs.
Rubin said high prices are supposed to ration demand and in the United States, the world’s largest oil user, the combination of rising prices and weak economic performance has caused demand to drop two percent from last year.
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But demand for fuel in China, India, the Middle East and elsewhere is growing fast, more than offsetting the slowdown in the U.S.
In some places, consumers are not suffering high fuel costs. In Middle Eastern oil producing countries, governments keep gasoline at about 10 to 15 cents per litre. In Venezuela, the price is only pennies a litre.
Also, high world oil prices are supposed to encourage increased output, but production in countries outside of the Organization of Petroleum Producing Countries is not increasing. Non-OPEC countries have been the source of most world production gains in recent years. But production from the North Sea is already declining and Rubin says Mexico’s production will start to plummet next year.
Continuing violence in Iraq and tensions with Iran limit production growth there.
This will keep the investment spotlight on the oilsands in northern Alberta and Saskatchewan and the Bakken oilfields in southern Saskatchewan and Manitoba.
It will help to keep biofuel plants economically viable despite rising prices for grain and oilseeds.
It will cause farmers’ costs to rise and food prices to increase. Labour will press for higher wages to keep up with the rising cost of living.
Sounds a lot like the late 1970s and early ’80s, doesn’t it?
