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By Robert Rapier on May 2, 2008 with no responses

Oil to $250 a Barrel?

In case you missed it, there were several stories this week – and of particular note coming from OPEC – that suggested that much higher oil prices may be on the way:

Oil Price May Go Up to $250, Warn Experts

Crude prices continue to baffle analysts and pundits. With the $100-era a well established fact in our daily life, there is now a growing chatter within the energy fraternity that $200 a barrel may not be a far fetched idea altogether. Is another global oil shock now gathering pace?

With limited additional supplies, alternative fuel still some decades away and demand far from collapsing, Deutsche Bank is pointing to a “huge risk” that oil prices would continue to rise in the near to mid-term.

“There is a huge risk that the oil price simply continues to escalate until it gets to some level (possibly $250) when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,” Adam Sieminski, Deutsche Bank’s chief energy economist, wrote in a report last Friday.

This is why I am still an oil company investor. I am invested in ConocoPhillips directly, and some others via mutual funds (including Brazil’s Petrobras). I have seen various analyses that suggest the oil companies are no longer good investments because they aren’t replacing their reserves. I disagree. As long as oil prices are rising faster than reserves are depleting, they will continue to reap increasing profits (until the government steps in – which I think they will do). This will also give them the cash to get into other energy businesses that look attractive. Who knows, the future may see Shell (for example) as the leading solar power firm in the world.

OPEC is suggesting that even $200 oil won’t cause them to boost production by much. I think you can read the writing on the wall there and know that they simply don’t have the production available. While production from OPEC has been rising – and Saudi’s production is back up to just over 9.2 million bpd (per the article), OPEC just doesn’t have the spare capacity they did a few years ago.