by Jerome a Paris
Fri Feb 25th, 2011 at 06:55:50 AM EST
While the most recent spike in oil prices (with WTI, the US benchmark, jumping above $100 and Brent, the more representative London price, touching $119) is directly linked to the unrest in North Africa, production interruptions in Libya and worries about more disruption in other Arab oil producers as political and social unrest spreads, it has always been deeply worrisome that in the middle of a deep economic crisis, oil prices remained so high. Other than a brief dip back to $40 at the height of the financial crisis in late 2008/early 2009, oil has never gone down below $75, which was an unheard-of price before 2008.
Some have blamed speculation (which had nowhere else to go in the face of QE monetary policies and zero-interest rates), some have kept on flagging peak oil; some, more bullish, simply noted the booming demand in emerging markets. In any case, for most of the past year, $70-80 was seen as the "new normal" and as a price level which would not handicap our slowly recovering economies - it's only been in recent days that fear of a new oil-induced recession has come back to the fore (as suggested by the above graph, attached to an explicitly titled WJS article: Rising Oil Prices Threaten Recovery)
But it seems that a fundamental change is underway in the oil industry: while it's not yet obvious that we're running our of oil, it's now certain that we're running out of cheap oil. Oil companies are busy developing ultra-deep offshore fields in the Gulf of Mexico, off Angola or Brazil; tar sands in Canada, ultra heavy oil in Venezuela and are thinking about Artic oil, shale oil and ever more expensive options. Even Saudi Arabia they are drilling deeper and deeper for oil these days.
And a recent Barclays study (sorry, no link, it can probably be requested from Barclays here) suggests that the cost of producing oil has skyrocketed in the past few years, at least for non-OPEC resources (but remember, OPEC represents only just over one third of global oil production), as shown in this graph. If the cost of a large fraction of the oil produced is now near $80, it seems highly unlikely that prices will ever go back below that level.
And if oil at $120 causes recessions, it looks like we're stuck in a rather nasty bind...
