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Oil Could Rise to ‘Astronomical’ Levels: Pro

Tuesday, 20 Mar 2012 | 10:06 AM ET

As demand continues to rise and geopolitical risks continue push prices higher, many wonder if oil prices will halt their ascent.

"The oil game is a lot different than the last time we had an oil price spike," Robert Brusca, Chief Economist at FAO Economics told CNBC. "We’re underpinned by this growing demand for new sources and that keeps oil pricesfrom really falling sharply."

Brusca explained that demand continues to grow even in countries such as China and India where retail fuel pricesare at a record high. "Their demands are still growing because we’re seeing a growing standard of living in these countries. We’re drawing more people into the modern economy." The increased consumer base is preventing oil prices from falling.

New Consumers Will Keep Oil Price High
"We have a big change in the world economy, with all these developing economies that are large¿ this really makes the oil game a lot different than the last time that we have an oil price spike," Robert Brusca, chief economist FAO Economics, said.

Geopolitical risks are also fueling the rise in oil prices, he said.

"The Saudis are in the midst of a program to pump out and ship a lot of oil to try to drive these prices down close to $100 per barrel, Brusca said. "I don’t think you can take any price off the table where the Middle East is concerned. If anything were to happen to escalate tension in the area, you could see oil going to levels that would be astronomical."

Despite rising oil prices, Brusca argued that the current shock is not nearly as painful as it was in the wake of the first oil shock of 1973. "There are more people who are using broader energy sources than they were in the first oil shock. This has helped to keep the damage more contained."

Many economists believe that oil demandis relatively inelastic. Brusca disagrees.

In a recent publication, Brusca explained that the energy market becomes more elastic in the long-run. With higher energy prices, we will buy more fuel-efficient cars, put more insulation in our homes, and move closer to the place we work. As a result, consumers have diversified their exposure to energy prices, and the rise in oil prices is no longer as shocking.

Brusca added that the U.S. economy is becoming more resilient to spikes in oil prices. "$4 per gallonis not a real shock anymore. The economy is producing more job growth, not less, and consumer spending has been on the rise."

As oil prices continue to increase, Brusca is confident that the U.S. consumer has the ability to adapt in years to come.

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