Is oil set to reach $100 a barrel?

Amid some of the more condescending prose that has gushed from the pens of economists in recent weeks, many have noted that in real terms oil prices are still only half what they were in 1980. The sub-message is worry not, all will be well; this is not an oil shock. It just looks like one.

Thus the US Department of Energy forecasts Opec's net oil-export revenues at $300 billion for this year compared with $550 billion in 1980 in 2004-adjusted dollars.

But why should oil prices stop at current levels? Markets have a habit of repeating the patterns of previous upturns, and today's price looks rather like the levels last seen in 1978, just before the revolution in Iran which produced the final upward spike that peaked in 1980.

Of course, we would need some similarly spectacular surprise geopolitical event to send the market to this kind of level again. However, even calmer observers can hardly find much comfort in the events of the past year or so, or even recent weeks.

Never mind geopolitics, what about the weather? Hurricane Ivan and friends have hit southern US oil facilities hard. Meantime, the Yukos saga has dented oil supplies from Russia to China.

The important point is that actual, as opposed to potential, supply disruptions have now spread outside the Middle East, Venezuela, Nigeria and Indonesia. There was even an article recently explaining how North Sea oil production had just peaked!

This is what you would expect after 20 years of low oil prices in the 1980s and 1990s. There has been underinvestment in new capacity and more significantly an unwillingness to invest.

The irony is that those countries that are investing in new energy capacity - and Qatar and the UAE are the only big investors in new capacity right now - will reap a bumper harvest. Those that played safe, and fretted about a sudden slump in oil prices will profit less from the boom due to a shortage of production capacity.

Now it may be that peace and tranquility suddenly breaks out around the world and gives big oil a breathing space to get its act together to install new capacity for the massive rise in demand that we know is coming from India and China.

But increasingly the smart money is backing an alternative scenario in which oil prices have to spike much higher before investment resumes. This is all likely to take some time and oil prices could well touch $100 a barrel before sanity returns to the market, or a global recession cuts demand.