When’s the next oil price spike?

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.