Why oil prices will keep rising

There are plenty of short-term factors affecting the oil price: tensions over Iran’s nuclear ambitions; rising militant activity in Nigeria; and worries over suicide bomb attacks in Saudi Arabia. Some analysts argue that if it wasn’t for these factors, oil prices would slip back towards the $40 a barrel mark.

But geopolitical tension has always been a feature affecting the oil market. The basic reason why we are pretty sure oil has entered a long-term bull market is much more straightforward: demand is high and supply is constricted. Simple as that.

As John Kelly of Abbey points out in “oil prices where now?” the last time the world was threatened with a major energy crisis it was rescued by the discovery of two new oil-producing regions, the North Sea and Alaska. These were both huge finds and, better still, were in politically stable regions.

So production from them was fast built up and Opec consequently cut back its own production until it was only running at about 60% of capacity. With excess supply knocking around (Opec couldn’t cut back too much – its member countries all needed the money), prices then fell in real terms. Problem solved.

But we’ll have no such luck this time round. Production in Alaska and in the North Sea has peaked and production in the rest of the world may well have done the same. Back in 1956, American geophysicist M King Hubbert created a model of all known oil reserves and their lifespans. From this he developed his theory of ‘Peak Oil’.

Moneyweek