The Cost of High Crude Oil Prices

Crude oil prices are approaching a 2 1/2 year high, ending at $105.79 on Friday… a gain of 1.3%.

Take a look at this chart:

Over the past five months — until late February — crude oil prices trended higher within the channel drawn in green. Even during the Egyptian uprising, prices stayed within the channel, and actually slid all the way back below $90 a barrel.

Then Libya took center stage. Gadhafi has lost control of key oil infrastructure and as much as 75% of production has been cut.

That sent prices screeching through $95 a barrel and breaking out of that green channel…

But prices didn’t stop there.

Since the beginning of March, crude oil prices have breached $100 a barrel, and are now scraping $106. It’s been a wild ride over the past two weeks… and we’re not done yet.

Take a look at the area I marked in blue on the chart.

We see some consolidation after crude oil prices popped through the upper limits of the channel. This has created a Flag Formation.

These chart patterns have an amazing "success" rate resulting in higher prices. According to Bulkowski’sEncyclopedia of Chart Patterns, flags have a 0% failure rate, meaning that in all the hundreds of flag patterns Bulkowski analyzed, all of them climbed at least 5% higher.

Bulkowski’s quick to point out that these formations do fail, just that he didn’t find any that did.

What does this mean? Simply, higher crude oil prices. The flag formation has an average rise of 69%. Does that mean we’ll see oil prices at $179 — more than $30 a barrel higher than record prices from back in 2008? Not yet, but oil’s not done rising.

We’re in uncharted territory here with crude oil prices climbing so swiftly, and as long as the Libyan uprising continues, oil prices will continue to rise.

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As of March 2, 2011, the Energy Information Administration reports gasoline prices up more than $0.68 from last year. At the same time, gasoline stocks dropped by 3.6 million barrels, though stocks are still up 2.8 million barrels from last year.

This has a lot of people concerned… And it’s not just the U.S.

Spain announced that it was lowering speed limits in order to save fuel. It’s one of 20 actions the government is taking to curb consumption because of higher prices. In all, the country is expected to save $2.3 billion a year.

And the country — which is still mired in debt from a collapsed housing market and the global financial crisis — isn’t wasting any time. These measures will be put into place today.

Here in the U.S., some folks are calling on President Obama to open the Strategic Petroleum Reserve (SPR) to help lower prices.

Right now, our SPR is filled to capacity with 726.5 million barrels of oil. At our current rate of consumption, that equates to about 38 days’ worth of oil. There’s no real estimate to how much oil President Obama would release, if he decides to open up the SPR at all…

Both President George H.W. Bush and President George W. Bush opened up the reserve to help lower prices, and they were successful. The first President Bush opened it up during Operation Desert Storm in 1991. The SPR ended up selling 17.3 million barrels to 13 companies.

George W. Bush opened up the SPR in the wake of Hurricane Katrina. In September 2005, the government sold 11 million barrels to five companies.

So how much of an effect did these sales have?

The first President Bush’s SPR release sent crude oil prices from $32.25 to $21.48 overnight. The second President Bush’s release had a slower affect… Oil prices went from $69.50 just before the announcement to $64.21 at the end of the sale.

We don’t know what kind of effect another SPR sale could have during this time of crisis, particularly because we don’t know when the situation in Libya will be resolved, and we don’t know if any other strategic oil producers will experience uprisings of their own.

This uncertainty may keep oil prices high, no matter what happens with the SPR.

And that means some areas could see $4 gas in the very near future. The recovery that knocked unemployment numbers back below 9% and sent factory orders up 3.1% will be under severe pressure.

That, of course, will send more and more investors to safe investments, like gold and silver. But I want to remind you of Jared’s article from Feb. 25… Jared told you about the Oil Services HOLDRS ETF (OIH:NYSE), and there’s still time to take a look at this ETF before it catches up with oil prices.

Jared said that if oil prices get as high as $120, we could see the OIH run as high as $200. That’s a 23% gain from current prices, and it could come fairly quickly if oil keeps up this pace.

Editor’s Note: It Can Happen in Just 72 Hours… There’s an event that could rattle the very foundations of America unlike any other… and it has very little to do with the value of the U.S. dollar. Get the details here…