Oil Forecast to Hit $100 a Barrel in 2011

Oil prices aren't supposed to go up that much in December. But bucking the trend, the price of crude has jumped in recent days, with some potentially harmful economic consequences for the new year.

This week the price of oil broke through the $90 a barrel barrier before retreating Wednesday, and some market analysts say it could hit $100 or more early in 2011. Oil hasn't shown that kind of upward movement since 2008, and consumers probably still remember what happened then.

Gasoline prices skyrocketed, hitting an average of $4 a gallon when the price of oil hit $140 a barrel in July 2008. More than a few economists believe it was runaway gasoline prices, as much as the credit meltdown and housing collapse, that pushed the economy into the Great Recession.

Why now?

Why are prices suddenly going up now, of all times? Because the developing world is recovering nicely from the recession and demand is growing faster than expected. The International Energy Agency has revised its estimate of world-wide oil demand for this year to 2.3 million barrels a day, the second highest in the last 15 years.

Consumption is also stronger than expected in the U.S. and other developed nations, increasing the expectation of future supply strains. As of yet, however, those strains have yet to appear in the U.S.

The latest report from the Energy Information Administration shows the U.S. has 355.9 million barrels of crude oil on hand, a 3.8 million barrel decline from the previous week, but a still ample supply.

Swimming in gasoline

When it comes to gasoline, supplies rose last week by 3.8 million barrels to 214 million barrels, while demand decreased slightly from the previous week. Even so, gasoline prices continue to climb, with the national average just pennies away from $3 a gallon, according to AAA.

Even though U.S. consumers are using less gasoline and wholesalers have plenty on hand, the price is going up because the price of oil is going up. If it keeps going up, it could spell trouble for the fragile U.S. economy.

Consumers living paycheck to paycheck may suddenly find that the cost of commuting to work each week is increasing, without an increase in income to pay for it. Economists say that in many ways, rising gasoline prices act as a drag of the economy as much, or more than a tax increase.

For now, motorists should not face any sort of gasoline shortage. U.S. oil stockpiles remain well above the historical norm, until recently at record levels. At the same time U.S. refineries have increased their output, going from 82 percent capacity to more than 87 percent.