Oil: $100 a barrel – or $200?

Nine of the last ten serious downturns in the world economy followed a spike in the price of oil, and we are heading for another spike, with oil back up near the peak of $78.40 a gallon that it reached almost exactly a year ago. A record number of options contracts are now being sold that entitled customers to buy oil in the future at $100 a barrel. That tells you where the inside players think the price of oil is heading, since those options will only be of value if the price were actually above $100 a barrel.

The spike at $78.40 in July, 2006 didn’t cause a recession, so why should this one? Indeed, why would even $100 a barrel cause a global economic crisis, given that one hundred US dollars today is only worth about the same in most other currencies as $78.40 was a year ago?


Oil sales are almost all denominated in US dollars, which are worth almost a third less in euros, pounds or yen than they were two years ago, so the countries of the Organisation of Petroleum Exporting Countries (OPEC), are not rolling in sudden wealth. The oil exporters spend most of their income in other currencies, so from their point of view the recent surge in the oil price only restores the purchasing power that they lost over the past two years due to the US dollar’s slide.

More importantly, most of the big importers of oil in the industrialised world are not really paying much more for oil than they were two years ago. The rising dollar price has been largely cancelled out by the fall in the value of the dollar, so it’s not really busting their budgets.

Trinidad Express