Oil is now flirting with $80 per barrel. In January, while many other analysts were predicting $40 to $60 oil, I predicted that oil would soon be back at $100.

There are obvious and real underlying reasons for the escalating oil prices. But news headlines have ruled the price of oil since at least 2004. There was no real rational economic reason for oil to reach almost $150 (which for people with short memories may seem to have happened last century – it happened in July 2008) nor was there any reason for below-$40 oil, which happened right after the economic crisis hit last fall.

The crisis overshadowed a November report by the International Energy Agency which showed that oil production from operating wells has been declining by 9.1% per year. That news should have sent oil prices dramatically higher, perhaps to $200. Even now, there is a lingering possibility that a strike by Israel on Iran could close the Straits of Hormuz and thus shoot the price into the stratosphere overnight.

The headlines started in 2004 and included the Abu Ghraib photographs, which increased enormously the fear factor in the Middle East. There was the re-Sovietization of Russia’s oil industry following the assault on Yukos by Russia’s then-president, Vladimir Putin, and the re-nationalization of Venezuela’s oil industry by the Hugo Chavez government. That perfect storm of headlines created one of the most telling and repeatable events from 2004 to last year’s economic collapse. With escalating energy and energy product prices, every quarter ExxonMobil, the largest multinational oil company, would announce the biggest profits of any company in the history of the world and “Big Oil” would be in the mouth of many politicians in many countries as the devil incarnate. And yet despite those huge profits, Exxon’s stock would often fall because the company would also announce that their oil production and reserves were declining. Shut out of reserves in some of the most prolific oil provinces of the world, such as Russia and Venezuela, international Big Oil was, and is, in trouble.

Recent hints of economic recovery and the price of the dollar are offered now as the reason for the oil price escalation. Those are real reasons, but they hide others. There should be no mistake: oil producing countries love $100 oil and they have little incentive to shoot themselves in the foot by increasing production. Neither the price escalation of the previous four years nor the oncoming one have anything to do with “peak oil.” This will eventually happen, but not for decades. Physically, but not necessarily politically, the world can produce 130 million barrels of oil per day, compared to the current 85 MMbbl/d. But achieving that level requires proper investment and management and will.

Many of the oil producing and exporting nations are run by regimes that want the oil revenue not for technological, and even business re-investment and long-term resource management, but to affect other internal political and geopolitical aims.

Let’s look first at Russia. From 1998, and the admittedly imperfect privatizations that involved Yukos and Sibneft, when the country produced 6 MMbbl/d, to 2005, when production soared to more than 9.5 MMbbl/d (during that time, annual production increases were nearly 10%) Russia was the brightest spot in the international oil business. There was talk of increasing production to 12 MMbbl/d, which some Yukos executives touted as realistic. Since then, Russia has vegetated to about the same production and the tax regime. And government control of the oil business can mean only one thing: imminent declining production and no incentive to do any of the spectacular things that Yukos and Sibneft became legendary for.

Venezuela is an even bigger factor, considering its oil dominance in the Western hemisphere. Before Hugo Chavez took office in 1999 Venezuela was producing 3.4 MMbbl/d and there were concrete plans to increase that production to 6 MMbbl/d. Instead, after the massive firing of practically all petroleum professionals and the re-nationalization and expulsion of international oil companies, Venezuela is producing 2.6 MMbbl/d, the lowest volume since the first nationalization in the 1970’s.

And of course Iraq, with a demonstrable ability to escalate its oil production to 6 MMbbl/d has recovered somewhat to about 2.4 MMbbl/d. Iraq may have quieted down a bit, but the sectarian violence is barely beneath the surface and the risks are still great. In a recent auction for oil blocks the interest by international oil companies was abjectly disappointing.

Saudi Arabia is the only country with excess production capacity, estimated at 2.5 MMbbl/d. This is the role that the country found itself in back in the 1980s, when at the prompting of then-US President Ronald Reagan, it overproduced. The ensuing oil price collapse contributed greatly to the demise of the Soviet Union which depended on oil for almost all its foreign revenues. Russia today depends pretty much at the same level on oil and gas. And Saudi Arabia has the capability, if it chooses, to bring enormous hardship on that and other oil producing countries. There is no evidence they will do so, considering it will bring huge hardship on the Saudis as well.

Finally, the signs of imminent Chinese exploding oil demand are already here. After phenomenal economic growth in the first seven years of this decade, oil demand was growing by annual double digits. A short-lived slowdown lasted for a few months after the dire headlines of last year’s economic crisis. But Chinese economic growth has bounced back to more than 8 percent. So did oil demand which just came in with vengeance. Last January and February, Chinese oil imports stood at 3.1 MMbbl/d, compared to an average of 3.87 MMbbl/d in 2008. But from March to June, oil imports averaged over 4 MMbbl/d and in July, they jumped to an unprecedented 4.6 MMbbl/d, an increase of nearly 20% over the average in 2008. (Source: China Customs, August 2009.)

Oil is on its way to $100, and it will not stop there.