The price of a barrel of crude hit a 2009 high on Friday morning, touching $78 before retreating slightly. Some people blame the weak dollar. Others are sure speculators are pushing prices up. Still others point at a sharp growth in demand from China. As usual, no single factor is the indisputable smoking gun. Everything works together: A weak dollar encourages investors to move their money into commodities while speculators crunch the numbers on growing demand from emerging countries like China and Brazil and India and start to place their bets.
Perhaps the most unusual aspect to oil's steady march upward is that it is happening while Europe, the U.S. and Japan are still mired deep in an economic slump. A great global rebalancing is occurring, and the price of oil is a key signal warning of this tectonic shift.
For example, September was a terrible month for car sales in the U.S. but it was the best ever in China. Automobile sales in China rose 78 percent over a year ago, further consolidating China's hold on the position of world's top auto market. China registered sales of 1.33 million vehicles, almost double the U.S. total of 746,000. China still has a ways to go before it breaks the all-time U.S. record set in July 2005 of 1.8 million cars sold in a single month, but if current trends continue, it could easily surpass that level in a year or two.
So far this year, China's consumption of oil has grown 8.2 percent over last year, and China's oil companies are on the prowl. Remember when the Chinese state-owned oil company Cnooc's attempt to buy Unocal backfired? The WSJ reports today that Cnooc is back in the hunt, negotiating with Norway's oil giant, StatOilHydro ASA, for a stake in some of StatOil's deepwater exploration blocks in the Gulf of Mexico. That would mark China's first entry into the Gulf.
Cnooc withdrew its offer for Unocal after it drew a storm of protests from some U.S. politicians.
But as tight credit has caused a lull in spending on offshore exploration, appetite for Chinese capital has grown, and opposition to Chinese investment may be less likely.
China's resurgent demand, its auto market madness, and its determined efforts to expand the reach of its oil companies across the globe all happen to come at a time when, as UC San Diego's James Hamilton points out, it is getting increasingly difficult to keep oil production from falling, worldwide. Oil at $78 dollars a barrel sounds cheap to me.