$41.56

May 16, 2004

That's the price of a barrel of crude oil as of Friday's market close - the highest level since 1983. And it's not likely to go lower. As the New York Times points out, Saudi Arabia has too many reasons to keep the price of oil high. The country's economy has been booming, and many new public works are to be funded with oil revenue. Further, the Saudi government is afraid of appearing too friendly towards the US, and many European and Asian companies are now making major inroads in the Saudi business world.

Recent reports claim that Saudi Oil Minister Ali Naim is calling for an increase in OPEC production. Curious, since it was just March when Naim forced a cut in oil production. Nonetheless, current estimates are that the OPEC member nations are already exceeding their stated quota by as much as 2 million barrels per day. An increase in the production ceiling may only legitimize this overproduction, but wouldn't do much for increasing actual supply. Most oil producing nations are already producing at capacity, and it will take months if not years to bring new supplies to market.

Current estimates are that there is currently a risk premium of $4-$8 per barrel on the price of crude. My belief is if a major event were to occur in the Middle East, one that would significantly disrupt oil production even for a short period of time, we could see $60 per barrel or higher. Historically, spikes in oil prices have been followed by economic recession in the US. The US economy, barely recovering from the dot-com bubble's burst, is in no shape to handle $40 oil, let alone any further spikes.