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Oil? Cheap? at these prices? Here is why:

1) Demand from China and India does not seem to slow. Add demand from Indonesia, Australia and Eastern Europe, and and oil never seemed so scarce.

2) Supply is short. Resources are getting dried up with every barrel of oil thats pumped. Pair that with declining levels of reserve in the US, and an uncertainty over OPEC's reserves, and the outlook seems bleak. To give you an idea, OPEC's capacity has been reduced by over 15% in the last 25 years.

3) Governments of oil producing nations, specially in South America are increasingly weary of big oil companies drilling on their land, poulluting their environment and using their resources to fatten their own wallets. Bolivia, Peru, Venezuela and Ecuador are now looking to increase taxes on these companies, along with nationalizing the industry, which means that public oil companies like Chevron and ExxonMobil will be sharing their projects and profits with government owned oil companies. For instance, 85% of the worldwide known reserves were open to international oil companies back in the 1960's. Now, less than 20% is open to them.

4) Production and Refining is running at full capacity. Any breakdown in production would send prices soaring higher. Refining is currently running at an unsustainable 94% capacity.

5) Higher cost of drilling, producing and refining will keep putting a cap on the profits that oil companies make. Add the chance of facing wind-fall profit taxes at home and tax threats from other governments abroad and there is little incentive for companies not to hold on to their cash. Drilling oil wells now costs 5 times as much as it did just 10 years ago.

6) Global warming, which results in stronger hurricanes, higher tides and climatic changes, will eventually hinder off-shore and deep-sea drilling, raising costs and increasing operational risk.

While alternative forms of energy might keep oil prices in check, I believe they will only prolong the inevitable - even higher oil prices. My 2 year target for oil is $125 and $200 in 5 years.

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Source: Why Oil is Cheap at $75 a Barrel (ETF: USO)