Many Energy analysts feel once the world’s economies start to grow again we could see over $100 a barrel of crude again. Their basis for this conclusion is that with oil down near $100 a barrel from its high (and falling), companies and countries will slow or stop their exploration for oil. Less exploration means we will have eventually have a supply shortage. (see Re-flation Trade! Really? for more insight)
This theory is correct, but I believe the timing is too aggressive. There is another theory that does not get as much airtime as the above mentioned which explains how increased commodities prices typically brings increased supply. Basically as commodity prices rise, countries and companies ramp up exploration and extraction of the commodity to cash in on the increased prices. Also with increased prices technology improves and extraction becomes more efficient.
This increase in supply typically overshoots demand. The question is, how long will this process take? The last commodities bubble that popped took place in the early 1980’s. How much supply is really out there? The world for the most part is contracting. The process of rebalancing the supply and demand curve of oil could take some time.
The real threat to this process, in my opinion, is the artificial supply control of OPEC. They have never been successful in their efforts for the long term because their success solely depends on the cooperation of the countries that make up OPEC. If a large percentage of your GDP comes from the sale of oil and your nation is starting to starve because demand has fallen off a cliff, do you sell what you have or hold onto it with hopes that oil prices will be higher tomorrow? I think the answer to that question is, depends on how much cash reserves you have.
Supply and Demand is what sets prices, everything else is just manipulation. Manipulation can only exist in the short term; eventually reality catches up and typically overshoots in the other direction.
