Could Oil Really Hit $250?
Had the boss of Russia’s state-owned energy giant, Gazprom, predicted that the price of crude would shoot to $250 a barrel at any other time, he would have been dismissed as mad, self-serving or both. But in the current febrile market, in which the price is quite capable of jumping $10 in a day, anything goes.
Oil prices have quadrupled since 2004; another doubling would be as traumatic a shock to the world’s economic system as anything that has been thrown at it since WWII – certainly worse than the oil shocks of 1973 and 1979. The likely outcome for the West would be a lethal combination of stagnating output and rising inflation; and not even the growth economies of China and India could withstand an oil price that high.
The latest price spike has baffled many, but it can’t all be put down to the widening gap between supply and demand. Nothing has happened in the real economy to justify such a sharp and steep rise. The current surge is far more likely to be a speculative bubble. The oil price is being kept high by a paper market driven by institutional investors, such as pension funds, which have channelled billions into oil futures, often as a hedge against the falling dollar.
However, it is not quite that simple. It’s a myth that the impact of speculation is more than marginal. Production is falling globally, partly as a consequence of rising resource nationalism. Access to resources for international oil companies such as BP remains very restricted.
Markets, in time, will adjust. Consumers in Europe and the US are already responding to high prices by moderating demand. But what the high oil price really tells us is that we need more investment in energy efficiency, technology, new production and new energy sources.
The hard fact is that none of the touted alternatives to oil – nuclear, ethanol, or renewables – will have any significant effect for at least a decade. The cavalry is not just over the hill – it has yet to leave the fort. Barring an unlikely huge increase in the value of the dollar, oil prices will therefore remain high.
Over the coming months, oil could feasibly fall by $20-$30 as some of the hot money leaves the market, but it is of general consensus that we’ve now got to live with crude at $100 plus. Oil at $250 could remain a pipe dream, but we should prepare for a painful adjustment nonetheless.