The critical element in this is not just the price of oil - but the price of jet fuel.
Jet fuel is a distillate of oil that sits just between heating oil [kerosene] and diesel fuel. Traditionally, the market has been driven by seasonal trends in the US - in summer, if demand is high, there is pressure on refiners to spill the aviation distillate into deisel. In winter, if demand is high, there is pressure on refiners to spill the aviation distillate into heating oil.
Why? Because for refineries, it is not just a case of cracking aviation distillate from the oil and selling it - there's a lot of additional processes required to ensure it meets aviation fuel standards [don't want a fuel blockage at 30,000 feet!!]. In many cases, it is simpler for refiners to just mix the aviation distillate into the next grade [up or down] and cut out the hassle.
That's why there is a premium of aviation distillate. Oil is $125 a barrel - jet fuel is $155 a barrel - a $30 premium. That premium has been growing steadily [for the reasons I mentioned] over the last 2 years - so that if Oil hits $150 a barrel, jet fuel may well hit $200 a barrel.
There are two other factors [not variables - they are fixed]. The shaping of the market - traditionally brought about by US seasonal factors - is now coming from super demand from India and China. That has swamped the market.
The second - and most critical - is refining capability. The US hasn't built a new refinery in over 20 years - and the current refining cycle shows refineries in the 'States operating at around 94% - that is, they are refining 94% of each and every day [on average]. Normal scheduled maintenance cycling demands that refineries operate around $85% efficiency - so, refineries are operating beyond maintenance requirements - and you can guess what's going to happen.
There have been very few refineries built in other parts of the world, for a whole host of reasons [environment in Europe, security in Africa, cost in South America]. Even some of the biggest oil exporters [Iran is a good example] export lots of oil - but have to import petrol and deisel.
A third factor in all this is the weakness of the US dollar. Oil has [almost] always been sold in US dollars. With the weakening of the US dollar, the purchasing power of oil producers has been eroded by over 30% in the last 2 years. They need oil to be 'overpriced' by $30 just to match where they were 2 years ago. You should also look at the long term price of oil versus the global economy [and I'm talking 150 years] - in relative terms, oil is still cheaper than it was in 1900!
Taking all of this into account, it is my prediction that oil will reach $200 a barrel by early 2009, with jet fuel hitting $250 a barrel. And when petrol hits $5.00 a gallon at the petrol pump in the US - look out! Watch the US economy dive!