The 'two disaster' rule on oil pricing

Oil spiked up to $107 on news that an Iraq pipeline had been blown up, potentially disrupting supply. Oil-consuming nations had watched crude drop to $100 on hopes that a slowing global economy would cut demand.

In all probability, the hunger for oil in areas such as China and India will keep the need for oil high. There is also evidence that older fields in the Middle East and the Arctic are not yielding as much crude as they once did. The supply and demand dynamics may keep oil prices high for a very long time.

Oil disasters like Iraq and Katrina almost always cause a rapid rise in oil prices because of concerns that, at least temporarily, crude will be more scarce.

But, there may be a "two disaster" rule that could spike up oil prices 15% to 20%, at least for a time. Under this set of circumstances oil might be interrupted in Nigeria -- where the government is unstable, and Iraq -- where there may be more attacks on the infrastructure. Or, the head of Venezuela could cut off oil because he hates the US. If this is combined with a pipeline problem in northern Alaska, crude could take a big run.

The "two disaster" rule has not been fully tested, but the chances that it will be in the next year are increasing. The world's political scene is too volatile and the pipe and refineries that supply oil are, in many cases, too old.

Crude is going to $120. It is just a question of when and for how long.

Douglas A. McIntyre is an editor at 247wallst.com.