Oil peaks, valleys, plateaus and plains

The world oil market has been a constant source of frustration for economic forecasters of late. Have the laws of economics been rescinded? The short answer is no.

The basic facts are straightforward. After plunging to a valley of US$10 a barrel during the global financial crises of the late 1990s, oil recovered to average around $30 during much of the 2000-03 period, except for a brief downward blip in late 2001. Then in 2004, prices began a steady upward trek, passing $40, $50, $60 and then $70. The peak earlier this year was $78.

There was never a shortage of explanations for ever-rising prices. World economic growth was running at record levels in 2004-05. China and India emerged as major oil consumers, with their joint share of world consumption rising from five per cent to 11 per cent between 1990 and 2005. Add a series of supply disruptions in Venezuela, Nigeria, Russia, Iraq and the U.S., plus the ongoing geopolitical stresses in the Middle East and analysts had grounds for forecasts of $100 oil or higher.

In the background was also the so-called peak oil theory, which postulates that global productive capacity has peaked. Even the peak oil adherents, though, would agree that the main impetus for higher prices today is not a true shortage of oil, but a shortage of spare capacity that left the system vulnerable to temporary supply shocks.

London Free Press