Editor’s Note: Natural resources continue to play a key role in fueling Asia’s economic development, and rising commodity prices also strengthen economic growth and development in resource-rich nations.

Oil prices serve as a barometer of economic growth because increased consumption in emerging markets goes hand in hand with economic expansion. And as most of growth in oil demand will come from emerging markets going forward, keeping current with oil developments is important to the global investor.

The Silk Road Investor’s model Portfolio has exposure to two of the most promising energy companies in emerging markets, both of which have returned more than 80 percent this year.

As I remain bullish on oil’s long-term prospects, this week’s installment of Emerging Market Speculator features energy expert Elliott H. Gue’s take on key developments in the global oil market. Mr. Gue is the editor of The Energy Strategist and MLP Profits.

Oil’s Rally is for Real

By Elliott H. Gue

A sizeable population of pundits is permanently bearish on crude oil prices. Earlier this year, when oil still hovered around USD40 a barrel, plenty of bears predicted that oil prices would slump to USD20 a barrel by the end of 2009.

And even as oil prices headed higher in the spring, several of these prominent bears continued to claim that the “fundamentals” didn’t support the rally in oil prices. As the rally continued some of the most prominent bearish arguments attributed the rise in oil prices to a weak dollar and/or the nefarious machinations of a group of speculators on the NYMEX futures market.

And this isn’t a recent phenomenon. I remember five years ago, I was invited on a radio show to discuss energy prices. I spent most of the twenty-minute segment debating the path of oil prices with the host, who maintained that US oil supply and demand conditions didn’t support crude prices above USD50 a barrel–a level that was considered elevated at the time.

So given the upward price action in the oil market I think it’s worth examining the reasons that crude oil bears have been almost uniformly wrong about oil prices in recent years.

On the demand side of the equation, the answer is simple: an overemphasis on US oil demand and inventories.

Although the US remains the world’s largest single consumer, using more than 19 million barrels of oil per day in 2008, America’s importance to the global crude oil market has roughly halved since 1965 and hit a new low in 2008. In 1965 the US economy consumed more than one out of every three barrels of oil used worldwide, compared to about one out of every five today.

And this trend is projected to continue for the foreseeable future. According to the US Energy Information Administration (EIA), total global demand for oil is set to jump more than 21 million barrels per day by 2030. Of that total, North American demand will grow only 1 million barrels per day, while demand from developing Asian countries is expected to increase over 14 million barrels per day.

My long-term view has been that global oil production will not rise 21.4 million barrels per day from current levels. Even with record-high investment in exploration and development from 2006 to 2008, global oil production expanded less than 350,000 barrels per day for two primary reasons: the increasing complexity of bringing new production on-stream and declining production from mature fields. That being said, I do think the EIA is directionally correct about the source of marginal demand.

That said, the relationship between US inventories and oil prices has continued to deteriorate over the past year and a half. The big run-up in crude inventories from mid-2008 through early 2009 appeared to validate the oil bears’ thesis; inventories rose sharply, and crude prices fell precipitously during the financial crisis. But in 2009 oil has soared to over $80 a barrel, even as inventories continue to hover just off 20-year highs.

The relationship between US oil inventories and global crude oil prices is broken for the simple reason that most of the marginal growth in oil demand is coming from the developing world. Viewing US oil supply and demand numbers in a vacuum no longer suffices as an accurate proxy for movements in global oil markets. Nevertheless, a number of bearish analysts continue to trumpet the inconsistencies between US inventories and global prices as unsustainable and the precursor to a major collapse–the same mistake they made in 2005 and 2006.

Looking ahead, as global economic data has been showing signs of improvement, the IEA has been steadily revising its estimates higher; in its November report the agency hiked 2009 demand estimates by another 200,000 barrels per day, to 84.8 million barrels per day–the highest estimate since January.

The trend in 2010 estimates evinces a similar pattern. Since July, the IEA has hiked 2010 global oil demand estimates by 1 million barrels per day to 86.2 million barrels per day. That is, the agency now expects that global oil demand will grow about 1.5 million barrels per day in 2010–similar to levels last seen in 2008.

As you may have surmised, most of this growth is projected to come from the developing world–not the US and Western Europe.

Growth in emerging markets is expected to accelerate into 2010, pulling along the global economy. IMF estimates predict that GDP growth in emerging markets will accelerate through 2014, powering global economic growth in excess of 4 percent from 2011 to 2014. Global growth of that magnitude is historically consistent with annualized growth in oil demand of around 1.5 to 2 percent, though a big rise in oil prices could temper demand a bit.