Oil price rebound may be five years off

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The recent collapse in oil prices to roughly US$55 per barrel makes this summer’s rise to US$150 per barrel feel like a bad dream.

Higher oil prices were a red herring that diverted central bankers’ attention from the global credit crisis to fighting inflation. Even now that the focus has firmly shifted to promoting economic growth, the prospect for a firm recovery in oil prices could still be years off.

Despite the progressive deterioration in the global financial system, oil demand held up strongly in the second half of 2008, then fell off a cliff.

A price of US$150 seemed unsustainable in the summer and forecasts of US$200 oil were foolhardy; however, I was lured by the idea that emerging market demand could support US$90 oil over the next year, thus wrong by degree, but still wrong.

Financial Post