Where’s the break point on the oil price?

February 27, 2008 | by Alex Evans | More on Climate and resource scarcity, Global system | No comments

Ed Crooks, writing on the FT’s energy blog, flags up some new work from Cambridge Energy Research Associates  on how we got to $100 oil - and how much higher prices can go.

On the former, CERA list four key drivers: the “growing shadow of fear over supply reliability”, demand continuing to rise despite high prices, inventory levels continuing to fall, and ongoing human resource and equipment constraints.  Financial markets have also intensified the process, they say, through demand for derivatives such as crude oil futures which “did not unilaterally create the momentum toward $100, but … did react to growing perceptions about potential supply inadequacy and exacerbate the underlying oil price trend”. 

So where will it all end?  According to Ed Crooks, CERA “raises the question of how much higher prices can go, but does not answer it”.  That said…

The piece appears to suggest that the “break point” for oil prices, as illustrated in figure 6 with some cute little blue figures, is about $120. At that point, factors such as the rise of energy efficiency, alternative fuels and other policy changes, as well as the economic impact, really begin to take their toll on demand.

But as one observer notes in the comments on Ed’s post, maybe CERA don’t pin themselves down to an exact figure because “every other time they’ve answered it they’ve been spectacularly wrong”:

CERA Prediction Record
2002: predicted $20, actual $26.16
2003: predicted $20, actual $31.07
2005: predicted $20 to low $30, actual $65
2007: predicted low $60 range, actual $72 as they state above.

An awful lot depends on how resilient the major emerging economies (and especially China) prove to the downturn in the US.  Watch this space…

Related posts

1. The oil price: what’s happening, what next?
2. Gordon Brown’s new line on energy
3. A price band for oil? Why not just do a global deal on climate?
4. When relative inequality has absolute impacts
5. Oil prices close to peak?

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