When’s the next oil price spike?

by | Sep 28, 2010


Back in 2008, just as the oil price started to plummet after hitting its all-time high of $147 a barrel, I did a post pondering whether the drop was “the start of a long decline, or just a brief pause to draw breath before a resumption of the relentless upward march of recent years”. I argued that oil prices would stay low as long as the credit crunch lasted, but that

once we’re through the crunch, we may be back to a game of cat and mouse between oil supply and economic growth. Demand falls, oil price falls; demand picks up, oil price goes back up too – but never for long enough to give investors a clear signal to pump cash into new oil supply infrastructure

Over at the Energy Bulletin, Dave Cohen’s just published a post thinking about the same question – and wondering when the next oil spike is due. His take is that the next crunch will likely be in 2013, give or take a year, as his graph below illustrates:

As Dave notes, this graph is not a forecast on oil prices, but rather a schematic illustrating that a) demand surges cause oil price shocks [i.e. the peaks on his graph]; b) oil price shocks cause recesssions and force reductions in demand [the troughs]; and c) the average price of oil goes up over time [the straight line]. Informally, he notes, “we can say there’s been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months”.

His whole post is worth reading (n.b. especially his emphasis on the key variable in all this, namely prospects for Chinese growth) – and leaves the reader wondering: how do we break out of the cycle?

As I argued back in 08, one answer could be massive new investment in oil production – remember the IEA’s consistent warnings throughout the downturn about how under-investment in new oil production is setting the stage for a new supply crunch. But there are two problems with that option. One: we’re into diminishing returns territory. With the age of easy oil over, production increases from now depend on unpalatable options like tar sands, oil shales and, ahem, a lot more deepwater drilling (which is projected to account for 40% of global oil demand by 2020). Two: this approach does nothing to solve climate change.

So, I concluded 2 years ago, “it looks like the only way through is for policymakers to agree a global climate policy framework that’s both global in scope and sufficiently long term to provide investors with an unequivocal signal of where to put their cash: this is the only way of squaring energy security with climate change”.

I still think that’s right – but obviously, prospects for that have dimmed considerably since Copenhagen. So where does that leave us? That leaves us, alas, stuck in the yo-yo world depicted in Dave’s graph (which looks a lot like the Multilateral Zombie climate policy scenario that David and I described in our 2009 report for the UK government on global climate architecture – see page 7 onwards).

Oh – and it also leaves us on track for 3 degrees plus of global warming.

Author

  • Alex Evans

    Alex Evans is founder of the Collective Psychology Project, which explores how we can use psychology to reduce political tribalism and polarisation, a senior fellow at New York University, and author of The Myth Gap: What Happens When Evidence and Arguments Aren’t Enough? (Penguin, 2017). He is a former Campaign Director of the 50 million member global citizen’s movement Avaaz, special adviser to two UK Cabinet Ministers, climate expert in the UN Secretary-General’s office, and was Research Director for the Business Commission on Sustainable Development. He was part of Ethiopia’s delegation to the Paris climate summit and has consulted for Oxfam, WWF UK, the UK Cabinet Office and US State Department. Alex lives with his wife and two children in Yorkshire.


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