Posted: December 6, 2007

When world famous commodities trader Jim Rogers appeared last Monday night on a U.S. cable TV program, he hammered home the point that most oilfields in Russia, one of the world’s two biggest oil producers, are at or past “peak” production.

Two days later, Peter Jackson of Cambridge Energy Research Associates, the noted energy consultancy, told the Financial Times newspaper that Saudi Arabia, the world’s other biggest producer, looks more than capable of significantly raising its annual output.

And so it goes in the now almost daily battle between peak-oil believers and deniers, a battle likely to be even more in the news in 2008 as rising demand puts increasing strain on the world’s major oil producing countries, all of which need to fire on all cylinders to keep the global economy well-supplied with oil.

Simply put, peak oil is the point at which the world’s oilfields collectively can not increase their output any further, no matter what the demand for oil is, thus raising the specter of an oil shortage that could wreak havoc on the global economy.

As energy investors look ahead to 2008, they should expect a lot of price uncertainty, as peak-oil believers and deniers take turns holding forth in the media and the oil trading pits. One day it could be Matt Simmons vs. Daniel Yergin, the next T. Boone Pickens vs. the CEO of ExxonMobil. Happily holding coats will be TV anchors and an army of global traders, private equity firms and mutual funds – all of which love market volatility because it can boost their profits if they are ahead of the wave.

As much as the financial professionals may profit, however, the consumer-driven U.S. economy may suffer, as Americans go through bouts of depression and elation as they pass their corner gas station, and as corporate budgeters struggle to get a handle on their spending plans.

Until Saudi Arabia opens its books to the world – and nobody should hold his breath waiting for that to happen – the uncertainty surrounding whether oil can continue to be produced in sufficient quantities isn’t going to go away, and the peak oil battle will continue until actual Saudi production fails to rise when it’s absolutely needed.

However, there is one indisputable fact:

Oil is a lot more expensive today than it was one year ago. Even after the most recent pullback in crude prices, the average price for a gallon of regular in the U.S. is still 33% higher than it was one year ago. The price of crude is still in the high $80s compared with the mid-$50s a year ago.

Unless prices fall off a cliff between now and the end of the U.S. winter, some time next spring, no matter which side is on top in the peak-oil debate, unless prices suddenly fly in the face of seasonal cycles, the price of crude will be higher than it is right now – likely above $100 a barrel. The average national price of a gallon of gas in the U.S. will be too – likely in the neighborhood of $3.25 to $3.50.

Start there when determining your investment strategy for 2008.