Some see oil bubble while others see trouble

The reason for that kind of thinking is that the world’s “cheap" oil has been found and exploited. Even if producers continue to find new sources to keep up with growing demand, they’re going to have to drill deeper in more remote parts of the world. And the same inflationary pressure on oil prices is being felt on the increasingly tight resources needed to find and produce new oil — from drilling rigs to skilled workers.

“It's now twice as expensive to start a new oil field as it was three years ago,” said Cambridge Energy Research Associates Chairman Daniel Yergin. “All of these commodity prices are interacting with each other.”

It’s also less likely OPEC will slip up again and glut the world’s markets. Some members, including Venezuela and Nigeria, are having trouble producing at capacity. Political instability in big producers like Iraq pose an ongoing threat to supplies. Even Saudi Arabia has far less excess capacity than it did in the 1980s and 1990s. That makes it much easier for OPEC to keep prices high.

“OPEC is now up to a level that they're willing, frankly, to defend oil  prices at," said Diane Swonk, chief economist for Mesirow Financial. “A long time ago they were defending $25 per barrel. Now they're willing to defend over $80 a barrel.”

Since strong demand for oil has been a key factor in the run-up, a slowing economy should help reduce demand. But while the U.S. economy has slowed — and may have even slipped into recession — the rest of the global economy is still growing, especially in developing countries like India and China.

The growth of those developing economies also has sparked a longer-term trend of increasing wealth, which in turn increases demand for oil. As consumers buy more cars, for example, the overall base demand for gasoline rises — even if those economies slow down.

“In emerging markets, we're seeing a rise in real wages,” said John Brady, who follows the oil market at MF Global.  “In China alone, in 2007's first-quarter auto sales were up on a year-over-year basis 27 percent. And there’s little reason to see a trend like that come to an end, especially because China subsidizes the price of gasoline.”

China isn’t the only one. In Venezuela drivers can fill up for 19 cents a gallon, while in Iran drivers pay just 38 cents. Libya, Kuwait, Egypt, India, Nigeria, Malaysia, Indonesia and Iraq also subsidize gasoline to keep pump prices lower than the actual cost.

In those countries, higher gas prices have not discouraged consumption the way they have in Europe, Japan and, more recently, the United States, where consumption is declining slightly.

Longer term, the higher price of gasoline should encourage U.S. consumers to squeeze more miles out of each gallon. Despite big gains in efficiency after the surge in oil prices in the mid-1970s, the average fuel economy of cars and light trucks sold in the U.S. has remained pretty much flat since 1985. But overall mileage has fallen, as the share of lower-mileage light trucks and SUVs has risen from about 20 percent of the total fleet in 1980 to about half of all vehicles on the road today.

As suburbs have expanded, Americans are driving further to work, according to Federal Highway Administration surveys. In 1983, the average commute by car was 8.5 miles; by 2001 that had risen to 12.2 miles.

The good news is that those same surveys found that there’s room for some conservation if gasoline prices do go through the roof. About a third of the vehicle-miles traveled in 2001 were work related: the rest were for family and personal business (35.4 percent) and social and recreation (24.4 percent).

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