Oil Pushes Through $100 Level…Again

Why is the price of oil $100 per barrel?

The short answer is a key pipeline's flow was reversed on Wednesday -- the Enbridge Seaway Pipeline, which opened an outlet for crude oil from the central U.S. and Canada, and that may help alleviate a bottleneck at the Cushing, Oklahoma storage hub that had kept West Texas Intermediate-grade crude (WTIC) at a lower price than other, comparable oil grades, such as Brent.

That pipeline flow reversal pushed WTIC oil over $100 major psychological resistance, with the world's most vital commodity jumping $3.04 to $102.40 per barrel on Wednesday. Meanwhile, brent oil currently trades at/near $112.50 per barrel.

It's hard to imagine, but less than 10 years ago, in 2002, oil traded for less than $30 per barrel, in current dollars.

Many Factors Pushing Crude Higher

The long answer is that a series of factors in the past 10 years have combined to push oil again to triple-digit-levels at the end of 2011. Oil hit about $115 in the spring during the Libyan civil war, and hit an all-time high of $147.23 in 2007 -- or about $160 in current dollars -- during the leveraging bubble.

The biggest factor, oil analysts say, is economic growth in developing nations. China, India, and much of Asia for that matter, along with South America and Eastern Europe are building-out their infrastructures amid solid GDP growth. That's expanding their middle classes, as well, leading to millions of new drivers on the road, pushing up gasoline and diesel consumption.

The second factor in crude's surge has been the weak dollar. Simply, oil, priced in dollars, tends to increase in price when the dollar weakens, and vice-versa, all other factors being equal. And, as most investors are aware, the dollar has taken it on the chin in the past 10 years, declining in value against several major currencies, including the euro, yen, and Swiss franc, and other currencies, and oil's price has been bid-up accordingly.

Traders bid-up dollar-denominated oil when the dollar declines in order to maintain the purchase power of their oil investment: they want to be able to buy the same amount of goods with those weaker dollars, so they request more dollars.

And speaking of investments, that's the third factor that's led us to the land of $100 oil. Institutional investors, concerned about a possible rise in inflation and even further weakening in the dollar, have piled in to oil as an alternative asset, and that's pushed oil up, perhaps as much as $20 to $30 higher than it would normally be, given current supply / demand conditions.

Finally, there are oil speculators, much chided by U.S. Sen. Bernie Sanders, I-Vt., who enter the oil market daily, hoping to profit from oil's intra-day/one-day price gains and closes.

Sanders would like to curb oil futures speculation, and has proposed a bill to reduce/eliminate it, but Senate Republicans, and some Democrats, are against it.

Oil's Reign

Emerging market growth. A weaker dollar. Institutional investor use of oil as an alternative asset and as an inflation hedge. Oil speculators. Each has contributed to oil's return to triple-digit-levels. It's the reason U.S. gasoline prices are averaging about $3.41 per gallon for regular unleaded.

Of course, when an alternate, universal, plentiful, practical, and affordable power source is discovered, oil's reign over the U.S. economy will be over. But that day is not today.