On December 21, 2007 the price of oil was in the $90 range. As we recorded “Outlook 2008” on that day I predicted a price of $140-150 by mid-year. And, yesterday on June 26, 2008 I was proven right, as oil climbed above $140 for the first time.

Looking ahead, let’s put to rest one misconception. Wishing devoutly for the oil age not to be entering the second half of its life, many commentators promote a notion that the high price of oil is “all speculation.” Having seen investment bubbles come and go in IT and housing, they have convinced themselves that oil (and gasoline) today are overpriced by 25-50%, and would come down that much if only the speculation were to end. But they are wrong, spectacularly wrong, as Paul Krugman notes.

In 1999 oil was at $10 per barrel. That was the year that production from the North Sea peaked. Now, production from Mexico is past peak, and oil exports are falling gradually as oil producers use more of their own product. The simple and stark fact is that the world produces about 85 million barrels a day, and uses about 86 million barrels. There is no slack in the system, and this is what drives prices, not speculation (though speculators play).

There are over-optimistic scenarios for increasing oil production, going so far as to suggest that production will increase by 50% in the next decade. Drill, drill, drill scream the pundits and the Republican presidential candidate, none of whom have considered that the oil age is at the beginning of the end. Search the history of oil discovery, and all the really big discoveries are decades in the past. The highly touted “huge” fields of the future, off the Brazilian coast, in Alaska, on the continental shelf, and even in the Arctic ocean of our dreams, are for the most part either unproven, or where known are tiny by historical standards, usually amounting to a few months of global consumption at most. So, we are not going to produce our way out of high prices.

My prediction now? Oil will fluctuate between $130 and $150 for the summer months, fall back toward $110 or a bit lower as demand moderates in the face of high prices and the industry attempts to influence the election. Then will begin the climb to $200, where oil will settle by year’s end.