James Hamilton, an economist at the University of California, San Diego, lays out a powerful argument for the fundamentals behind the oil spike. While he believes there is some speculation in the market currently (duh), he is convinced that demand is driving the price. Specifically, the jump in demand from Asia and the Middle East:
…Asia and the Middle East accounting for 60% of the increase in petroleum use between 2003 and 2006. North America and Europe contributed only 1/5 of the growth.
Petroleum consumption in China from 1990-2002 increased at a 7.2% annual compound rate. During 2006, China used 2 barrels of oil per person. For comparison’s sake, Mexico used 6.6 and the US 25. If China’s current rate of growth were to continue, they would consume 20 million barrels a day by 2020, on par with current US consumption.
And Hamilton’s not a peak oil guy. He just sees demand exploding. The good news: He doesn’t see oil prices rising forever, just until China can’t afford it:
I think we will see some net production gains [in oil] this year, and expect this to bring some relief for oil prices. But I cannot imagine that the projected path for China above will ever become a reality. Oil prices have to rise to whatever value it takes to prevent that from happening.
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