Oil goes on binge while we seek sober clarity

As oil prices crossed the threshold into triple-digit figures this year, peak oil was taking its place as more than just a theory that the world would run out of sufficient quantities of oil that was financially viable to extract. But it is more likely as an eventuality that would come to pass, probably within a decade.

An upward price trajectory for oil made it far easier to understand the link between prices and energy resource depletion, even though peak oil analysts cautioned that recession was bound to follow a price spike, thus reducing demand and lowering prices. This in turn would cause further price hikes, setting in motion a roller-coaster effect.

It now seems clear that price volatility is indeed going to be the wild card in this game. When oil hit a July high of $147 a barrel (R1 180 a litre at yesterday’s exchange rate), it seemed plausible that $200 a barrel was within sight. But barely two months later a barrel costs about a third less and the target within strike is now $100 (an inconceivable price just a few years ago).

A fundamental analysis tells us that prices have been falling on concerns of slower global growth, coinciding with the biggest drop in oil demand in the US in a quarter of a century, as higher fuel prices influenced American motorists’ summer holiday plans.

Nevertheless, fundamentals do not fully explain the speed with which oil bubbled close to $150 and back down again.

Business Report South Africa