Oil on the way to a C-note per barrel

Over the last several months I have had the opportunity to talk to a good number of oil and gas executives.  Way back, say, just last summer,  when oil was only at $65 per barrel, it still seemed like a stretch for the oil guys (yes, all guys) to claim oil would hit $100 by the end of 2007.  Now, according to Reuters, oil has just hit $92 per barrel, up 30% since August alone.  It seems the C-note per barrel may arrive quite soon.

Part of this run up in price is due to the decline of the dollar, which may further encourage a shift to trading oil in euros.  The follow on effect of moving so much trade away from the dollar can't be seen as a good sign for the U.S. economy.  Yes, it is still true that foreign governments still hold large amounts of U.S. government debt, which will always be denominated in dollar and which gives many nations an interest in propping up U.S. currency.  But slippage in international use of the dollar for trade makes me even less interested in keeping any business I do here in the U.S.  I have just accepted my first project from Canada, and the contract stipulates pay in Canadian currency.  I might even ponder leaving it in that currency, as the Canadian dollar has been appreciating with respect to the U.S. dollar at a fairly decent rate.

Anyway -- back to oil -- a significant motivation in the increase in price is limitation of supply and increased demand.  Some of this will get fixed as new refining capacity comes on line.  Shell, for instance, is investing US$ 7 billion in doubling the capacity of a refinery in Texas, though this will take many years to come on line.

Bio-era's numbers suggest that by 2020, given current plans, biofuels will amount to 10% of global liquid fuel use.  That doesn't seem like much, but the increase from ~2% to 10% of use will account for 50% of the global increase in use, which is a big deal.  I am beginning to wonder if this is already an underestimate.  Many companies are making good progress in producing various liquid fuels using microbes (see previous posts here and here), and any shift away from the dollar in trading oil will cause further substitution within the U.S.

It will be interesting to see what effect this has on the economics of distributed fuel production.