Hurricane Katrina ripped through the Gulf of Mexico causing oil prices to reach another record-high of $70 a barrel.

Over the past seven years, crude oil prices have risen almost seven-fold! In December 1998, crude traded at roughly $10.5 per barrel and recently it recorded an all-time high, over $70 per barrel.

What is amusing though is that during the entire course of this massive advance, the majority of analysts, politicians and OPEC officials have consistently called for a top in the oil price! So far, the experts have been proven wrong.

In the meantime however, oil has continued to surge. The problem for the establishment of course is that the price of oil is dictated not by officials but by supply and demand. It is this dynamic that is now pointing towards a significantly higher oil price.

Like it or not, the era of cheap oil is over and expensive oil is here to stay. My research has convinced me that the supply and demand of crude is seriously out of balance.

The last time crude oil prices went through the roof was in the 1970's. In late 1973, there was political unrest in the middle-east and the result was an oil embargo imposed by OPEC. This caused oil prices to soar from $2 a barrel earlier in the year to over $10 a barrel in December 1973. The oil crisis stunned the world and America was caught totally off-guard. This event was followed by the Iranian Revolution in 1980, when Iranian oil production came to a standstill. Due to this further disruption in supply, oil prices exploded higher and recorded their all-time high at roughly $40 per barrel. Adjusting for inflation (in today's dollars), oil had in fact peaked at $90 a barrel in 1980!

So, it is worth noting today that it was largely supply, which caused oil prices to rise twenty-fold in the 1970's.

In the early 70's, American oil production was peaking; a fact, which was largely unknown at that time. A legendary scientist by the name of King Hubbert had predicted in 1956 that the US would peak as an oil producer during this time. Back then, the experts did not take Hubbert seriously. After all, America had been the largest oil producer for the past 100 years. In 1970, American oil production hit a record-high of 9.6 million barrels of oil per day. Academics dismissed Hubbert as a whacky scientist not realising that 1970 was in fact the year when oil production peaked in the US! By the end of that decade, America was replaced by Saudi Arabia as the world's largest producer of oil - and it has stayed this way ever since.

Now, let us return to the current situation. So, why has oil surged and where is it likely to go in the years ahead? For this, let us turn to the primary drivers - supply and demand.

Supply is extremely tight, OPEC is already pumping close to capacity and most of the major oil provinces are well past their peak output. It is a known fact that once major oil-fields hit peak output, their production rates declines significantly. Such fields are then able to produce oil for years to come but at a greatly reduced rate.

The last major oil provinces were discovered between 1967-68 in Alaska, The North Sea and Siberia. Alaska peaked in the 1990's and its peak output was 2 million barrels per day. It now produces 900,000 barrels per day. The North Sea peaked in 1999 at 6 million barrels per day. Current production is down by 25%. Siberia peaked at 9 million barrels per day. At present, it produces 5 million barrels per day. As mentioned earlier, America peaked in 1970-71 and current output is only a shadow of its record-high. Furthermore, according to Chinese and Mexican officials, their own biggest oil-fields Daqing and Cantarell respectively are also close to their peak output. The ensuing decline from these two fields alone will create a shortfall of 1.8 million barrels per day!

Let's face it; our world now depends heavily on Saudi oil. The Saudis claim that they have 260 billion barrels of proven oil reserves and their oil fields are capable of pumping 15-20 million barrels of oil per day. But, will the Saudis be able to deliver when oil demand rises in the years ahead? For the answer, let us examine the Saudi claims.

Up until 1979, the Saudi oil company "ARAMCO" was owned by major foreign oil companies. In 1979, just before Saudi Arabia removed the foreign interest and nationalised ARAMCO, a final audit of Saudi oil reserves was conducted. The study revealed that Saudi Arabia had 110 billion barrels of proven oil reserves. Then, in the mid-1980's, soon after ARAMCO was nationalised, Saudi proven oil reserves miraculously jumped by 150% to 260 billion barrels! Nobody knew how this happened and it is highly questionable, considering that the last major Saudi oil-field was discovered in 1968! How the Saudis manage to boost their proven reserves by 150 billion barrels since taking over ARAMCO is still a mystery. To complicate matters further, for the past 25 years, Saudi proven reserves have remained constant at 260 billion barrels. How can Saudi reserves stay the same at 260 billion barrels when it has pumped almost 60 billion barrels of oil since 1980? This is one question, which begs an answer.

Next, let us closely examine Saudi Arabia's oil production capacity, which seems to have mystified the world. The majority of people believe that Saudi Arabia can keep supplying the world with endless quantities of crude oil. In fact, the reality may be very different. Not many people realise that over 90% of Saudi oil comes from only six oilfields, which were all discovered before the 1970's. So, all these fields are now extremely old and experts argue that they are now well past their prime. Ghawar oilfield is the super -giant and has provided 55-60% of Saudi oil over the past five decades! According to experts like Matthew Simmons, Ghawar is past its peak already and likely to enter into a major decline. Take a look at Figure 1, which was presented in Matthew Simmons' new book, "Twilight in the Desert", which shows the major Saudi oilfields and the years in which they peaked.

Figure 1: Major Saudi oilfields past their peak!

Some analysts argue that oil supplies are infinite and Russia has found a way to pump oil from previously untapped oil reserves. If this is true, why is oil trading over $50 per barrel? Surely, prices would have collapsed on this good news.

Global demand for oil is another story altogether. Paris-based International Energy Agency (IEA) estimates that in the fourth quarter of this year, demand will hit 86 million barrels per day, a record-high.

Asian demand for oil is rising fast and is expected to double within the next 8-10 years. Over time, we can expect the emerging economies to consume a lot more oil than the industrial world - a fact that can't be disputed due to the sheer population numbers in developing countries. What will happen when the Asian demand for oil doubles to almost 40 million barrels a day in a few years time? Where will these extra 20 million barrels come from? This excess demand will most probably be tackled not by increased supply, but by significantly higher prices.

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