One key ingredient to unraveling a lie is to look back at the story as it unfolds. In the case of oil and oil projections we don't have to look very far back to see how the story changed.
The EIA released a study in June which gave us the worst case scenario for oil pricing. Here is the graph:
There's $100 oil on the chart, but look at the date - 2030! We are already way over the red line on this chart, which predicted a 2006 high of around $60 based on production levels vs. demand. Everything above $50 is just a fear factor.
As we know, demand is dropping below expectations and production is back on track after Katrina. No matter what people say about supply, the fact is there are no shortages and no country has had to tap their reserves either.
Despite what you hear, during the entire 2005 hurricane season, with 25% of the nation's oil capacity off-line for weeks, we got by with a draw of less than 10M barrels (out of 82Mbd of Global production):
As you can see, these barrels have already been replaced and our nation's SPR sits at 687M barrels out of a capacity of 727M (94%). US consumption is, at the current pace, 20M barrels a day of which we import 14 and produce 6. Since half of that 14 comes from Canada and Mexico and another 4M barrels come from non-opec countries, that leaves just 3M barrels a day that we get from OPEC and, yes, Iran.
So IF Iran totally shut off oil AND stopped us from getting ANY OPEC oil for 6 months, we would still have half our reserves available. Iran, on the other hand (and the neighbors they cut off), would have effectively cut off 90% of their revenues for 6 months and likely plunged the world into a recession that would drastically cut oil demand.
This of course assumes that they actually cut the oil supply off, rather than sell it to someone else because if they sell their oil to someone else, then we just buy the oil the other person didn't buy and nothing changes for us at all.
The non-stop parade of oil "analysts" who debate whether oil will hit $80 or $100 at the end of the year assume that there is virtually no price elasticity in oil. They assume that, in defiance of all known economic principals, you will continue to consume more and more gas at $3 or $4 or even $5 per gallon than you did at $1. You are expected not to turn down the AC or turn down the thermostat in the winter no matter how shocking your bill is because, if you don't consume it, they are not going to be able to charge you $100 for it!
Here we have an article published by OPEC that says this is nonsense! Even though the US consumer has shown little penchant for saving so far, it seems very obvious to me that demand destruction is already on the march. 2/3 of US oil consumption goes to transportation and a 41% decline in truck and SUV sales last month shows you how quickly we will adapt.
Close to 10M barrels a day of US consumption goes into our passenger cars. All we have to do to shave 2M barrels a day off our imports is to increase our average vehicle mileage from 19 to 24mpg (Europe averages 34). I've read that if you keep your tires properly inflated you can add 10% to your mileage and I'm sure there's lots of other ways we can cut consumption if properly motivated.
The real problem is that we are so rich as a nation that we are just putting up with this price gouging which encourages them to just keep going!
What about China? China consumes less than 7M barrels of oil per day while we consume over 20 - a 5% reduction in US usage would offset a 15% increase in Chinese consumption. The fact is China is already taking steps to curb consumption on their end too.
Recent market action suggests that $75 is indeed a tipping point and you can see that the markets. After having accepted $50 and $60 fairly well, we have had a lot of trouble as oil breaks over $75. As pointed out, oil at $75 includes a 50% terror premium that adds nothing to the economy and I see nothing stopping oil from falling back to the $60-65 range in the near future if the Iranian "crisis" turns out to be a non-event.
A two-year chart of oil (OIH) and housing (HGX) gives you a good idea of where we could be headed if this bubble bursts:
Switch to the three or six month view and you will see something that should stop oil bulls from sleeping at night - the two indexes are getting back into sync! Now if you think housing is going up 50% in the near future, by all means keep buying oil stocks. If not, as any housing bug can tell you, it's a long way to the bottom.
As an extra, here's a good article on some overbought oil stocks.