Conflict or not, high-priced oil is now a part of life

On July 7, even before the sharp rise of tension in the Middle East and the Israeli attacks against Lebanon, the price of oil touched $75.78 in New York, its highest level once you adjust it for inflation since 1980 and the aftermath of the Iranian revolution. One of the most interesting aspects of this latest spike was that nothing in particular provoked it. Although some analysts pointed to recently released data in the United States, showing that it is consuming 1.4 percent more gasoline today than it did a year ago, and others blamed North Korea’s missile tests, there is also a distinct possibility that we are simply entering a new oil price paradigm.

There are various contemporary geopolitical concerns and these are inevitably adding to the price of oil, as is increasing levels of speculation. Hedge funds have been showing increasing interest in oil futures in recent months, as they have in commodities across the board. But these combined are unlikely to contribute to more than $10 to $20 to the overall price. Even if we subtract the security premium and the speculator’s mark-up from current prices, a barrel of oil is still sitting comfortably at the higher end of OPEC’s new but unofficial price band of $40-$60.

Goldman Sachs, the investment bank that made headlines last year by predicting a $105 “super spike,” now maintains that we are in the second year of a five-year period of high oil prices, and that during this period, the average price will be at least $68. Gulf Research Center figures show that the OPEC basket price, the one of most relevance to the Gulf Cooperation Council, has averaged at $61.20 so far this year (June’s average was $64.57). The OPEC basket price has also climbed by over a fifth since the start of this year, 22.7 percent to be precise.

Indeed, current oil prices are a staggering 660 percent higher than they were in the late 1990s when oil was then trading for as little as $10 per barrel. These recent climbs have been steeper than the hikes witnessed in 1973 and 1979. Back in 1973, a 300 percent surge in oil prices resulted in inflation rates of over 12 percent in the United States and an incredible 23 percent in Japan the following year. Considering recent concerns about global inflation after a long hiatus, some are starting to wonder if the current oil price boom will end like those of the past. Perhaps, there is no new oil price paradigm.

The Daily Star (Lebanon)