Just how high will oil prices go? (page 2 of 2)

In fact, if we look at what happened to per capita oil consumption during phases of industrialization in the US between 1900 and 1970, we see that per capita consumption rose from one barrel per year to around 28 barrels. In the case of Japan's industrialization between 1950 and 1970 and South-Korea's between 1965 and 1990, per capita oil consumption rose from one barrel to 17 barrels.

In the case of China, oil demand per capita is still only 1.7 barrels per year, and for India it has only reached 0.7 barrels. By comparison Mexico consumes annually about 7 barrels of oil per capita and the entire Latin American continent around 4.5 barrels.

Therefore, starting from such a low base, oil consumption in Asia will, in my opinion, double in the next ten to 15 years from currently 20 million barrels per day to around 40 million barrels per day.

Remember also, that if China's per capita oil consumption went to the level of Mexico's per capita consumption China would consume 24 million barrels of oil daily, which would be close to 30% of global production. And since it is most unlikely that current total global oil production of 80 million barrels per day can be increased much - in fact, it may begin to decline because no major oil field has been discovered since 1965 - I expect that prices will increase further in future - possibly far more than anyone is now expecting.

I would, therefore, be very careful when shorting oil and would rather use any weakness, as a buying opportunity.

Lastly, I do concede that if oil prices tumbled to say USD $40 or possibly even $35, equities around the world might well rally temporary (in fact equities would rally in anticipation of such a decline). However, if I am right that in future oil prices could rise much further than is generally expected, geopolitical tension would likely increase dramatically, as countries such as the US and China would increasingly become concerned about adequate supplies.

And, in the case that oil prices were to rise in real terms to their 1980s highs - well over US$ 100 - then the foundation for World War Three would be laid and most certainly begin to weigh heavily on equity prices for which I cannot share the prevailing widespread optimism anyway. Financial stocks have begun to weaken and this is an indication that something is not quite right!