A world of dear oil

Financial Times
Published: Oct 17, 2007

For most of the past 35 years, reports of the oil price touching record highs would have politicians hitting the panic button and journalists cranking out tales of crisis.

But although oil prices were nudging $88 a barrel yesterday, it was difficult to detect any great sense of foreboding. Stock markets traded lower, but not dramatically so. In continental Europe, the UK and Japan, plenty of reasons besides the oil price were advanced to explain share price falls.

Today, the International Monetary Fund unveils its latest forecast for world growth next year. Leaks suggest forecast growth will be revised down from 5.2 per cent previously, but remain solid.

Yet $88 a barrel for oil is not a trivial sum. In real, inflationadjusted terms, the oil price has been closing on the all-time highs recorded in 1980 after the Islamic Revolution in Iran. Then, high oil prices helped inflict a noxious brew of stagnation and inflation on the industrialised world. If, as some suggest, oil continues strengthening to $100 a barrel, previous records will be broken in real terms.

And the world would do well to expect firm oil prices in the future. The latest upsurge has been linked to fears of Turkey pursuing Kurdish rebels into Iraq and disrupting supplies. Perhaps more worrying are falling crude oil and product inventories in the industrialised countries and the rapid growth of Chinese demand for oil to fuel a national fleet of cars and trucks growing at a spectacular rate. The International Energy Agency warned during the summer of a tight oil market during the next five years as consumption accelerates and output falls in mature areas.

Admittedly, the pricing of oil in US dollars gives a very imperfect picture of its true cost in many parts of the world. Priced in euros, sterling or renminbi, oil has still to reach highs recorded in July and August last year.

In dollar terms, however, the oil price has touched new highs. This should encourage a less profligate use of energy in the US. On the other hand, strains could surface, especially among US households.

The US Department of Energy this month forecast rising heating bills for US households this winter, ranging from 10 per cent more for households using natural gas to 22 per cent more for those using heating oil.

The DoE expects some oil price fall, but not below $70 a barrel. Add the subprime crisis and the IMF's view, expressed this week, that the US dollar could depreciate further and it is difficult to see higher oil prices leaving the US unscathed.