Now that Goldman Sachs once outlandish forecast of oil at $150 to $200 a barrel over the next 18 months is only $10 short of being fulfilled, commentators have been forced to look elsewhere for the lunatic fringe of forecasting. Step forward the Russian oil giant Gazprom with its raising of the bar to $250 a barrel.
Britain is calling for a summit of oil producing nations in Jeddah this Sunday to discuss the cause of higher oil prices, and perhaps the organisers should be sure to include Gazprom, which clearly has ideas of its own. More conservative forecasters have, after all only been consistent in one thing and that is being wrong.
Oil futures in New York this week pressed the $140 a barrel mark for the first time in history. Yet there is considerable disagreement among experts about the cause of the oil price hike. It is not as though oil producer countries have been conducting an embargo like in 1973, and they can claim in some innocence to be keeping the market adequately supplied, or at least in so far as they are capable.
The oil producers lay the blame for higher oil prices firmly at the door of speculators. This column last week went a step further and named the loose monetary policy of the Federal Reserve as the real culprit for supplying speculators with cheap cash to speculate on oil prices. Hedge funds and investment banks have certainly speculated heavily in energy futures this year.
Whether it would have been better for the Fed to tighten monetary policy and throw the US economy into an even deeper and longer recession is another thing. That this action would have brought oil prices back down sharply is not open to question.
But I am cynical about the true motivation behind politicians calling for an oil summit to discuss what can only now be described as an energy crisis in the industrialised world. Is this not more a matter of governments trying to shift the blame for serious economic problems on to somebody else – actually anybody except them will do – rather than come up with a workable solution to this growing problem?
There are two sides to this debate. Those like US Treasury Secretary Hank Paulson who point to fundamental supply and demand issues in the oil market due to the expanding consumption by emerging markets. And those who blame the speculators, and may be like myself point to money supply inflation by the US Federal Reserve as a big factor. The truth, as ever, is probably somewhere in between. Then it is a matter of saying that the base price should be say $50 and we have $50 of supply squeeze and $40 of speculation, or something similar. I doubt an oil summit to draft such a conclusion is really called for; the onus is for action, not attributing blame and deciding causal factors.
Oil is up seven-fold on its 2001 price, and is up 40 per cent this year, having recorded 28 all-time highs in 2008 so far. The BP Annual Statistical Review of World Energy came out last week and shows how the fundamental gap between supply and demand is growing.
Last year global oil demand stood at 85.2 million barrels per day, an increase on 84.2 million in 2006. At the same time global production dropped from 81.7 million to 81.5 million barrels per day. That is a recipe for higher prices in any supply and demand chart with falling production and rising demand.
A mounting economic downturn in the Western World will have an impact on oil demand, and also on the emerging economies such as China and India.
All markets correct themselves and the oil market will be no different. Prices will rise until the point at which demand falls back to the level of supply.
The emerging markets are going to have to become more efficient in their use of energy, just as the industrialised countries did in the 1970s. As the BP Annual Statistical Review of World Energy states high oil prices in 2007 actually led to a one per cent fall in US and EU combined oil consumption of 35.6 million barrels per day, while the thirsty emerging markets demanded four per cent more oil and consumed 36.2 million barrels per day.
If the emerging markets became more thrifty energy consumers that would go along way to solving the demand side of the oil price equation. In fact, high oil prices will force emerging markets to become more efficient in energy use but this will take time; and in the meantime higher oil prices look inevitable, sustained by cheap money from the Federal Reserve.
On the supply side, the BP guide shows that production is falling and that proven reserves have also begun to fall for the first time. Indeed, Saudi Arabia's crude output actually declined by 4.1 per cent last year, the biggest fall in total barrels from any oil producer, so much for raising production by 500,000 barrels per day this summer. It looks like too little, too late, and has done nothing to slow price rises.
Therefore, I have to conclude that blaming higher oil prices on speculators and the Fed's lose money is a part of the explanation for higher oil prices, but perhaps not quite the whole story.
The latest statistics from BP tell a story of supply and demand that no government can control, and leave Gazprom's $250 per barrel forecast looking far more credible.