It seems like a very strange deja vu. It wasn’t that long ago that we were witnessing a steep and steady increase in the price of oil. I don’t think that today’s price – US$71.89/bbl has any longevity. Whether up or down, it will keep moving, as I predicted last October:
If I get out my crystal ball, I would forecast oil to bounce around in the $60 -$100 range until the financial crisis settles down, as the marginal cost of a new barrel of production is currently between $70 – $90 per barrel. Once the global economy is perceived to be back onto it´s exponential growth path, prices will spike once again before dropping back to the marginal barrel range as the growth bubble is burst once again by high oil prices. Each time this happens, the marginal barrel priced will ratchet up, taking the overall average price up with it. In short, I predict a wild roller coaster ride.
Bank on one thing – volatility.
I think we’re witnessing just such a movement. The current steady rise reflects the perception that we are on the road to economic recovery. (We may actually be on that road, but it is the perception that I think is important)
As usual I have to take the cheap shot and point out that oil is already dearer than the Budget Economic and Fiscal Update two weeks ago said it would be over the next five years!
Now that we’re in that marginal-price-of-new-oil price range, I have to ask. Is this the sign of a real recovery, where new oil does have to come into production to support a return to economic growth? Is this simply the perception of an economic recovery, which for all intents and purposes has the same effect on prices, but is ephemeral? Or finally, is the 9.1% decline rate of existing fields, as predicted by the International Energy Agency (IEA), forcing the market into the new oil production just to keep supplies steady?
My guess is that today’s price results from a combination of the second two. The economic news out in the world is not that rosy, despite all the money being printed in the name of stimulus. The massive production decline rates continue whether we are in recession or not.