The International Energy Agency raised its crude oil demand forecast this week; at the same time, the IEA noted inventories in the developed world are their lowest in two years. To deal with this imbalance, OPEC is promising to increase oil production by 400,000 barrels per day.
Unfortunately, raising production might not be enough to stop prices from spiking this year, says Stephen Leeb, chairman of the Leeb Group and author of The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel. "What's really important for investors to realize is how sensitive oil prices are to changes in demand," he says in the accompanying video.
The big issue is that OPEC might not have the capacity to keep up with rising demand for long, Leeb says. "There's much less excess capacity in OPEC than people believe and that, I think, is exactly why you're seeing this incredible relationship between small increase in demand and large increase in oil prices."
His theory is corroborated by a Wikileaks report released this week, published by The Guardian, claiming U.S. officials think Saudi Arabia may be over estimating its reserves by up to 40%. In cables with a U.S. diplomat, Sadad al-Husseini, a geologist and former head of exploration for Saudi oil monopoly Aramco, warned in November 2007 that Saudi production is likely to hit peak (time of maximum production) as early as 2012.
If this or any scenario rattles the markets and drives up demand, prices could spike as high as $150, warns Leeb. "You're going to see oil prices go up very, very fast; much faster than people think," he says. That would likely "lead to a real terrible decline in the market and real hardship in the economy." Since the 1970s, every time oil prices rose 80-100% in one year, it's resulted in market or economic calamity, Leeb notes.