Blog: Dave LeggettOil price

Dave Leggett | 4 August 2004

The price of oil on international markets is hitting new highs right now and I can't help wondering whether we're seeing a permanent move to higher prices or a temporary situation that will eventually correct itself. No need to panic yet. The market seems to be tight at the moment for all sorts of reasons (tight refining capacity in the US, political uncertainties and Mid-East, a drop in Russian supply due to Yukos and bouyant demand globally - eg China), but the analysts seem to be saying that there is actually not a shortage of reserves.

And experience over the last thirty years is that new reserves keep being discovered so that the amount we have left, or number of years' consumption before known reserves are gone, stays reasonably constant. Maybe the market simply has to readjust to higher demand, and high prices could actually encourage the extraction of oil from more costly fields and areas of the world.

I would guess that the oil price will come down again (a not unreasonable supposition my dear Watson), but the shifting balance of the global economy - especially the rapid growth of the Chinese economy - also suggests that the price will not come down to previously experienced low points if 'business as usual' global economic expansion continues. The average price over time is a bit higher.

But a global economic recession - that would certainly cause the oil price to plummet. And what would cause a big recession? High oil prices and their inflationary effects have done it in the past, so we need to keep an eye on those international prices. Unpleasant at the gas pump now perhaps, but sustainable - but what if they double?


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