UK: A permanently high oil price might not be a bad thing

Oil is in blow-off territory and a reaction in the price is inevitable, probably quite soon. But that does not mean that we will return to cheap oil in our lifetimes.

All right, take that with a pinch of salt. Hardly anyone a year ago successfully predicted the rise in the oil price to $120 per barrel


But in recent weeks several things happened that made a tight situation a really wild one. Most obviously, the fall of the dollar has gathered further impetus, particularly against the euro, now above $1.60. Part of the rise of the oil price is simply a dollar effect. Though the formal denominator is the dollar, the underlying price is de facto a basket of currencies of which the most important is the euro. As you can see from the first graph, there is a close relationship between the dollar/euro rate and the dollar-denominated oil price. Part of the case for believing that the oil price is unsustainably high turns on a belief that the dollar is unsustainably low. We’ll come back to that in a moment.

There are other factors at work. Global demand remains strong, driven largely by the still-booming Brics