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In general, the cost of producing something should go down over time. (Inflation-adjusted). This holds true for oil. We didn't have the technology to drill offshore. Now, we do. Oil sand? Still too expensive too extract. It will be cheaper sometime in the future. True, oil price needs to go up to provide incentive for this kind of research but even without the oil spike, this level of efficiency will continue, albeit slower.
Energy is abundant. It cannot be destroyed nor created. It just exists some form or another. To satisfy for all of human kind electricity consumption, it takes only 7% of all of europe continents to be covered with solar panel. Once the technological breakthrough is obtained, the cost of energy from solar will go down. Same thing with wind. The problem with oil is that it is limited. Thus, while the cost of extracting oil becomes cheaper, those cheaply-located oil is gone. As a result, I suspect that in the long run the cost of extracting oil merely keep pace with inflation, as opposed to going down. Same thing with infrastructure. Cost of transporting oil should go down over time. But as we drill further through the offshore and arctic, the cost of transporting & distributing oil should stay constant inflation-adjusted.
Having said that, let's look at oil at $ 20 in the 2000s and $ 130s now. Does that translate into fair value? I don't have the demand picture with me. The one spreadsheet reference I had merely mention supply. But let's assume demand ~ supply. This is based on the fact that if supply < demand, we would have physical shortage of oil throughout the intended period. The intended period here is 2000-2007 and I don't see any oil shortage for the past 7 years. Supply has grown from 77.76 M BPD in 2000 to 84.6 M BPD in 2007. An increase of 9% over that period of time. Let's say that demand is much much bigger than that and the world is replenishing its oil inventory through out this 8 years. I would put 20% growth during that period.
Now, correct me if I am wrong, but in the long run, supply-demand curve will be elastic. Does 8 years is a long enough period? I don't know, perhaps it is not long enough and we need to wait for say 10 year period. But if supply-demand curve is elastic, then oil price should at least be 20% higher instead of hundred of percent higher. Add in our dollar depreciation of 60% (from EUR:US = 1, to EUR:US = 1.6) currently. Further, Adjust inflation during the 8 year period (say 4% per year compounded), then you add another 37% price to oil. Where would oil be?
2000: $ 20 per barrel
Demand increase: + 20%
Dollar depreciation: + 60%
Inflation: + 37%
2007-2008 = $ 52.6 per barrel.
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