3 Reasons Oil Prices Are Headed Higher in 2012

gas prices
gas prices

Americans have grown used to oil at $100 a barrel and paying more than $3 per gallon for gas at the pump. But don't get too comfy -- the price of filling up is probably going up in 2012.

Uncertainty in the Middle East, growing global demand, and a lack of easy oil will be the drivers behind the price spike, and as we've seen recently, any change in the status quo will send the black gold higher.

1. Countries with Crazy Leaders Produce a Lot of Oil

Crazy leaders
Crazy leaders

In case you've missed the latest in Iran's continuing nuclear drama, the country is threatening to blockade the Strait of Hormuz if the U.S. follows through on sanctions over its nuclear program.

The Obama administration and many analysts are brushing aside that threat because it would hurt China, a strategic ally of Iran, more than the U.S. But many people think that if Iran is serious, the situation could end in military action. Even this threat of action has supported oil prices in recent days, and it highlights how fragile the Persian Gulf -- and oil price stability -- is right now.

With the U.S. pulling out of Iraq and Libyan oil beginning to flow again, there are relatively few supply disruptions right now. But Iran could change that in just a matter of days.

2. Global Demand is Only Growing

Getty Images
Getty Images

In the U.S., demand for oil may not be growing much, if at all. But emerging markets like China, India and Brazil are certainly picking up the slack and increasing their demand.

In November, China imported 32.3% more oil from Saudi Arabia and 76% more from Russia than it did in the previous year. With millions of new vehicles hitting the road in China every year, that trend will continue.

The situation is similar in India, where imports play a huge role. In 2010, India imported about 70% of the oil it consumed, most of which came from the Middle East.

Unless the global economy heads for a recession in 2012, global oil demand will continue to increase and prices will likely rise as a result.

3. Oil is Getting Harder to Find

oil is hard to find
oil is hard to find

One of the biggest reasons U.S. net petroleum imports have fallen from 60.3% of consumption in 2005 to 45.4% so far in 2011 is that sources of oil have become more unconventional.

Unlike the good old days of Standard Oil, when you could drill a hole and oil would come spurting out, hydraulic fracturing in shale is much more complicated and has only relatively recently become economical.

Kodiak Oil & Gas (KOG), Continental Resources (CLR), and Whiting Petroleum (WLL) are three of the oil companies using this technology to unlock oil in the Bakken shale play in North Dakota and Montana. But it isn't cheap, and these producers need oil prices to remain high to continue their production.

The same goes for ultra-deepwater drilling around the world. Cobalt International (CIE), Statoil (STO), and Total (TOT) are all eagerly anticipating drilling in deep water off the coast of Angola. But the ocean there can be more than a mile deep, and the wells themselves will be drilled more than a mile farther underground -- not a cheap endeavor even if the reserves they find are as large as expected.

The Final Conundrum

Beyond the gas station, the price of oil in 2012 will have a far-reaching impact on the economy. As prices go up, consumer confidence goes down, and we cut back on spending to prepare for bad times. But if prices fall, it could mean we're headed into a recession -- something no one wants right now.

The only silver lining is that the higher prices will also push explorers to expand production domestically and create more jobs. But that's small consolation when you're filling up at the pump.

Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool and check out his personal stock holdings. Motley Fool newsletter services have recommended buying shares of Total and Statoil.


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