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?
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Well then why not implement a law that prevents speculators from creating an overvalued price per barrel? Seeing as most of the prices are manipulated by hedge funds why can't the SEC pass a bill that puts a limit on futures trading on necessities where as something like gold can be unregulated.
Which is why Boeing just released a new, modern jet that requires......drumroll, please......
Refined Oil !
When I start counting more high efficiency cars on the road than SUVs, then I will agree that fuel is expensive. Right now the SUVs are in favor by a wide ratio, about 5 to 1.
with oil at the current level the world economy will slow, stop and retreat over the next several months should oil stay at or go higher in price.
the idea of supply and demand will come forth and because no one can afford it the demand will drop. oil has long been the life blood of the world economy however over the past 10 years a greed factor has shown up creating extreme oil prices, it is in the best interest of all to keep oil at the $50-$60/bbl mark inflation will be incheck and the world will be able to afford energy.
the idea of green energy is problematic in that the current energy companies are the ones developing it so it will not reduce our cost ordepenece only shift it to something else.
The whole oil market it just a house of mirrors to give the illusion of high costs.
It all begain when Nixon got oil de-regulated.
If oil was on a truely open market the prices would be in the $50-$60/bbl prices
No one seriously believes Saudi Arabia has 4 million barrels of spare capacity to offset these losses. Even if they did, they can't just flip a switch and get to peak production. This could take weeks if not months to ramp up. If the contageon spreads to Iran and Iraq, $200 per barrel may seem cheap before the bust. This, however, does not address the world's dwindling supply crunch looming out at the end of 2012.
http://seekingalpha.com/article/255961-crude-oil-at-200-a-barrel-oil-output-at-risk?source=yahoo
http://www.jfcom.mil/newslink/storyarchive/2010/JOE_2010_o.pdf See Page 23
http://www.chathamhouse.org.uk/files/16720_0610_froggatt_lahn.pdf See Page 10
People aren't going to care that much about the natural sanctity of ANWR once they find out they are spending more money on gas to drive to work then they are earning money at work.