‘Paradoxically, the very worst outcome [for oil prices] might not be a sudden shock, but a milder recession. If this were to create some temporary spare oil production capacity by depressing demand, … the urgency of the need to prepare for the impending peak could easily be forced off the policy agenda…
As the global peak approaches and the market tightens, any sudden interruption of oil production could [then] spark the last oil shock.’
David Strahan (2007) — The Last Oil Shock (p. 177)
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In early 2009, I described the dramatic rise and fall of the oil price associated with the financial crisis of 2008, and looked at the future oil price trends which might follow recovery through into 2010.
Two years on, economic uncertainty remains, and a return to growth is far from guaranteed. Yet across this time, the oil price has risen steadily. From a low of $40 in February 2009, Brent crude stands at well over $120 today.
The last time when the oil price was above $100, back in 2008, the economy was still booming. Three years later, during the long aftermath of the deepest global recession for eighty years, the oil price remains close to historic highs. How can this be possible?
Unrest in the Middle East has clearly offered the latest impetus behind the upward trend, providing the catalyst for the oil price to break through $100 in February and to surge further in the weeks since then.
In 2009, Libya pumped 1.79 million barrels of oil per day. The country is an important supplier of light, sweet crude to Europe, and is the world’s seventeenth oil producer.
In recent weeks, output in Libya has almost ceased. How the shut-in of less than 2% of the world’s oil production translates into a 20% rise in the oil price serves amply to underline the tightness of global petroleum supply.
There’s very little spare capacity to play with. When, and if, the geopolitical situation in the Middle East calms down, oil prices will likely correct, in part. Yet it’s clear that the overall trend is firmly upwards.
The impact of the global recession has merely been to divert attention away from the growing energy shortfall which will face us all in years to come.
Amidst the wild gyrations in energy prices of the past few years, steady trends have been hard to pick. This cyclicity is certain to continue, as investors react to economic news and to the direction of the market at any given moment.
The path of the oil price in recent times has been dominated by the historic summer 2008 peak and the dramatic slump which followed this. Plotting the oil price on a log scale serves to moderate the effects of dramatic shifts like these, placing more emphasis on the trend across a longer time scale.
The graph above serves to illustrate how from trough to trough, and from peak to peak, oil prices have doubled every five years since 1997. Extending these trends forwards could see oil prices reach $250 by 2015, and $500 by 2020.
The oil price has increased by a multiple of twelve since then. And in that context, a four-fold increase by the end of the decade seems almost modest.
As far as oil prices are concerned, it’s time to imagine the unimaginable.
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