With very limited excess capacity in Saudi Arabia and the rest of OPEC, further production shutdowns in the convulsing Middle East will soon push oil prices to new record highs. The Brent futures contract, the world’s benchmark price, almost reached $120 per barrel in London last week. With gasoline soon to cost six pounds a gallon (£1.32 pounds/liter), the British government is already considering alternative rationing systems to the brute price mechanism at the pumps.
Amid the chaos sweeping through the Middle East, it is easy to lose sight of where oil prices were trading before the political protests began. Brent was north of $100 per barrel before protestors started sweeping into Cairo’s Tahrir Square. The triple digit price for oil was due to runaway global demand, which by the end of last year had soared to more than a record 87 million barrels per day. It was yet not about potential supply shocks from Libya or anywhere else in the Middle East.
Now throw in supply disruptions from the world’s largest oil producing region, and it isn’t hard to find a path to $200 per barrel oil.
When I first predicted $200 per barrel oil prices in 2008 as the chief economist of CIBC World Markets, it was in the context of expecting another four years of global economic growth. Of course, that didn’t take into account the impact of triple digit prices on fuel-dependent GDP growth. Even $147 per barrel prices brought global economic growth to a screeching halt.
It is all the more remarkable that despite triggering the world’s deepest post-war recession and a rare, albeit temporary decline in global oil consumption, oil prices had already soared back to triple digit levels even before the Arab revolt.
And it will be difficult to keep prices from moving even higher as investors start piling on the oil bandwagon, particularly when they see most of Saudi Arabia’s much touted four million a barrel a day excess capacity is largely of the fictional variety while, at the same time, noticing how little effect monetary tightening is having on restraining China’s exploding fuel demand.
What speculators will have to worry about is where things are going. If we learned anything from the last recession, it was our oil dependent, transport heavy, global economy doesn’t run very well on $147 per barrel crude.
And other than bailing out bankrupt investment banks and automobile companies at the cost of record public-sector deficits, not much has changed in our economies over the past three years to suggest our next encounter with that these kinds of prices will lead to a different result.
We are moving inexorably closer to another oil price induced recession. And when we get there, oil demand and oil prices will once again collapse.
The only question is will we see $200 per barrel oil first?