--Clyde Russell is a Reuters market analyst. The views expressed are his own.-- By Clyde Russell (Reuters) - There is an almost universal assumption among consumers that high oil prices are a bad thing, but the current crude cost of around $100 a barrel is likely to prevent prices from jumping significantly in the coming years. The failure of the Organisation of Petroleum Exporting Countries to agree on raising output quotas showed that the group has difficulty in putting a ceiling on prices. No need to worry though, the market will limit gains as ultimately if prices do get too high, the Western world will tip back into recession, thus lowering them again. What you really want is a Goldilocks situation, where prices are high enough to spur the development of new sources of crude, as well as alternative fuels such as biodiesel, electric cars and natural-gas powered vehicles. But they mustn't get too high to choke the already fragile economies in the developed world. Low oil prices, which in the current environment would be anything below $70 a barrel for West Texas Intermediate, only serve to drive up demand and lower the incentive to look for new sources of supply. Since oil demand is expected to rise from around 88 million barrels a day currently to something north of 100 million by 2030, it becomes clear that new sources of crude are going to be needed. Speak to oil company executives and it is also clear that the low-hanging fruit in crude reserves is long gone. What is left is becoming more and more expensive to extract as the industry runs harder and harder just to stand still. Shamsul Abbas, the chief executive officer of Malaysia's state oil company Petroliam Nasional, pointed out a recent conference in Kuala Lumpur that the industry spent $2.4 trillion between 2005 and 2010 in order to just keep output steady. Boosting supply by another at least 12 million barrels a day, in the face of declining output from existing fields, means more spending and this means crude prices can only go up. However, if crude remains at levels above $100 in real terms, companies will spend the money because the returns will still look attractive. Canadian oil sands ventures are said to need at least $60 a barrel to make a return, and some deepwater projects need a sustained price of $80. Given that projects such as these are now the suppliers of the marginal barrel of oil and it's clear cheaper oil now means much more expensive oil later. What are the alternatives to crude, which is still mainly used as a transport fuel? Electric vehicles need a critical mass of demand to become more economical, and if retail gasoline prices remain above 100 cents a litre in the U.S. and double that in many parts of Europe, it's not too hard to see more city dwellers switching to battery-powered cars. Similarly, the discovery of abundant natural gas reserves in shale rock is a potential game changer. Not only can trucks be powered by super-cooled liquefied natural gas, as United Parcel Service Inc. already does, so can ships that currently burn high-sulfur and polluting fuel oil. Still, it's unlikely that alternatives to crude can meet the demand for liquid fuels up to 2030, and that means more oil will be needed or demand needs to be lowered. One of the best ways of crunching demand is to increase prices, and it would be preferable for the United States to impose an excise on gasoline sales. While this would solve a duel problem of lowering the need for imported crude while replenishing a depleted Treasury, there is little chance of this happening in the current political environment when the lower house of Congress is controlled by Republicans, some of whom oppose any new taxes. If there was a 28th amendment to the U.S. constitution, it would probably be the right to cheap gasoline and any politician proposing to tax fuel would likely be the target of a sustained and vitriolic campaign. There is more chance of retail prices rising in Asia, where governments are starting to remove price controls and subsidies. China adjusts prices more frequently, although the full impact of crude gains hasn't been passed through. India freed up gasoline prices but still controls diesel. Malaysia plans to gradually remove fuel and power subsidies while putting in place measures to help the poor and Indonesia will probably be forced to follow suit as subsidies eat up an unsustainable chunk of the national budget. But once again, measures to lower demand won't be enough to meet the likely gap between world crude demand and supply, thus sustained higher oil prices are the best way to ensure resources are allocated to boosting supply.

Source