Harsh truth behind oil at $105 a barrel

Who would have believed that the world could shoulder an oil price that reached a record high in New York last week of $105 a barrel? The soaraway price of black gold has prompted apocalyptic visions of a planet that will soon run out of oil, with dire consequences for mankind. While many will find that prognosis unnecessarily alarmist, even serious economic commentators are talking about ‘peak oil’.

According to this theory, we have reached the point of no return: demand is so strong that supply cannot hope to keep up. High oil prices are something we are going to have to live with for the foreseeable future.


But trying to forecast where the oil price will be in five years, or even five months, is a mug’s game. In 1999, the Economist famously splashed its front cover with the suggestion that the price of oil could sink to $5 a barrel. The magazine got it horribly wrong, but the idea was far from silly at the time: oil had been trading at $10 a barrel and there were rumours the Saudis were about to flood the market with cheap oil in a bid to reduce the surplus that was keeping a cap on prices.

Today, at over $100 a barrel, the oil price has never been higher, but there is widespread disagreement over why it’s so expensive. One explanation is that the price is being driven up by speculators seeking a hedge against the falling dollar and rising inflation.

Is that all? If the answer is yes, the oil boom could end the same way as the dotcom bust of seven years ago when shareholders inflated the price of technology and internet companies, only to see values crash when sentiment changed.

The Observer