Oil prices swung wildly this week, rising to near 30-month highs after Saudi Arabia sent troops to Bahrain, then plummeting to less than $100 a barrel on expectations that an earthquake-ravaged Japan would demand less oil.
The ride is not over yet, say economists: There may be ups and downs, but long term, high oil prices are here to stay. On top of volatility caused by natural catastrophes and political upheavals, a tight oil supply and increasing demand promise to keep driving prices up steadily over time. Prices could fluctuate between $60 to $200 a barrel, but probably will not go back to $30 or $50 anytime soon. Higher prices are going to be part of the environment for the next few years. There just isn't a lot of surplus oil.
The fallout from the 8.9-magnitude earthquake and tsunami in Japan has added to oil market confusion. Oil prices are being pulled in two opposite directions. The disasters in Japan are pulling prices down in anticipation of slower Japanese growth in the short term, and because their oil refineries are damaged and they will order less crude oil. Lifting prices higher, however, is the civil unrest in Bahrain now that Saudi Arabia and other Gulf nations have sent troops into Bahrain. The net result will still be higher oil prices because of the fear that Saudi Arabia is now completely encircled by countries that are unstable. Expect oil to remain in triple digits and gasoline prices to stay above $3 for the rest of the year.
Every $10 increase in price per barrel translates into about a 25-cent increase per gallon of gas. Before the Japanese earthquake, the U.S. Energy Information Administration forecast a gallon of gas to average $3.56 in 2011, with a 25% chance that gas could top $4 during the summer.
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