The “invisable hand” of the markets like to do a lot of stuff, but one of the main principles of our modern economy is the idea of supply and demand. If something is in high demand and supply is low the price goes up. If demand goes down, or supply goes way up the price goes down. However something fishy seems to be going on with oil prices, people keep talking about the soaring demand in places like India and China causing high oil prices. Oil prices have skyrocketed despite the fact that world oil demand grew just 1 percent in 2007, according to the latest Vital Sign Update from the Worldwatch Institute. Contrary to published reports, the new era of $100-plus oil is not caused by soaring demand for the energy source, but by inadequate global supply.

Oil prices nearly doubled during 2007, from just above $50 a barrel in January to nearly $100 at year’s end. Meanwhile, world crude oil production actually fell from 73.8 million barrels per day in 2005 to 73.2 million barrels per day in the first 10 months of 2007.

“It’s too early to say definitively that oil production has reached its all-time peak,” said Worldwatch Institute President Christopher Flavin. “But it’s clear that the world is having a hard time expanding production to meet even a modest growth in demand.” The oil company just can’t get it up. Supply that is.

The United States remained the world’s largest oil-consuming nation in 2007, using almost one-fourth of the global total at a rate of 20.7 million barrels daily. But rising oil prices discouraged greater demand and left U.S. oil consumption virtually unchanged for the third year in a row. OECD-Europe and Japan consumed 15.4 million barrels and 5 million barrels a day respectively.

Chinese oil consumption increased 5.5 percent in 2007 to 7.7 million barrels per day—accounting for half the growth in global demand for the year. China’s oil use has nearly doubled in the past decade and now accounts for nearly 9 percent of the world total.

Geological and political factors led to a decline in production in some of the world’s largest oil-producing countries in 2007, including Indonesia, Mexico, Nigeria, Norway, the United Kingdom, and Venezuela. Falling production in Saudi Arabia allowed Russia to become the largest producer, despite slowing production growth.

Crude oil production also increased in several countries, including Angola, Brazil, and Canada (the latter mainly through horrifically devastating tar-sands mining). War-torn Iraq raised oil production to its highest level since the U.S.-led invasion in 2003, but production remains below prewar levels.

In March 2008, world oil prices hit $110 per barrel, breaking the inflation-adjusted record set in April 1980. Record prices led to record profits for many oil companies in 2007, including Chevron and Royal Dutch Shell PLC. ExxonMobil Corporation reported a net income of $40.6 billion, the single largest annual profit in U.S. corporate history.

“While oil companies are enjoying record profits and increasing their investment in oil exploration, they are struggling to replace their reserves,” said Flavin. “It would be wise for them to invest more of their profits in new energy sources such as solar and geothermal energy—before their oil reserves are further depleted.”

And thats the rub. If Exxon and Shell and BP and the rest became wind turbine magnates and started making billions producing solar energy, I am not sure I would be complaining very much. But they seem to want to squeeze every last drop of profit out of every last drop of oil, the earth be damned. So if the price of oil doubled last year, could it do it again next year? Are you ready for $200 a barrel oil?