Introduction

The paper will consider the present crude oil price retreat and what it likely portends for the future price of oil

Build Up to Present Events

Ted Trainer (1997) predicted large and permanent increases in oil prices after the year 2000 due to increasing scarcity. In fact in March 2008, oil broke through the psychological ceiling of $100 a barrel, and later in early June rose to around $140 on the way to $150. Even the president of OPEC (Organization of Petroleum Exporting Countries) has warned of oil reaching $200 a barrel (Robertson, 2008). Goldman Sachs has announced that the $200 barrier could be hit any time within the next two years (Foroohar, 2008). Alexey Miller, head of the world’s largest energy company, the Kremlin-owned gas giant Gazprom, has predicted that oil will reach $250 a barrel “in the foreseeable future” (Fortson, 2008). Ferris-Lay (2008) has forecast that the black liquid gold could climb to an incredible $300 a barrel in the foreseeable future. In the slightly longer term we have been warned of an economically lethal price of $380 (Porter, 2005).

On the heels of such predictions, in the months of July and August 2008, oil has fallen from $147 a barrel (11 July) to $115 (8 August), a large drop over four weeks of 22%. However, since 2003, even in a strong upward trend of oil prices, there have been several dips in the price ranging from 10% to 31% (a Paris, 2008). So the latest retreat of 22% should not be so unexpected.

What it all Means

Notwithstanding, many saw this July/August 2008 price retreat as a continuing stable trend to much lower levels and rejoiced over the permanent relief that much cheaper oil would bring. However, Robert Hirsch and his associates stated that as Peak Oil “is approached, liquid fuel prices and price volatility will increase dramatically” (2005, p. 4). We would be well warned to expect price volatility, with dramatic peaks and troughs, and that even if the oil price significantly retreats at times, this should not lull us into complacency. There have also been several precedents of oil retreating in price over recent decades, only to spring back again into new record price hikes (see graphs in Williams, 2007). The likely overall trend for oil will be aggressive price rises from the underlying causes of low supply and high demand.

But what could halt the effects of dwindling oil supplies’ higher prices due to scarcity? World political and geopolitical events, economic growth and decline, have all influenced the price of oil over the decades as shown in the graph below. If significant levels of recession were to grip the world’s largest economies (for example, USA, EU, China and India), then there could be significant alleviation of the effects of dwindling oil supplies, as the demand for oil would significantly drop. This would mean that the world would not feel the problem of a shortage of oil and high prices for a while, but as the economies pick up to grow again, we would be confronted with the same old problem – less oil supplies, increasing demand, and therefore price hikes to even new records.

In the table below, based on the yearly crude price figures, the peaks and troughs of crude oil prices are shown from 1984 to July 2008. We can see from these figures that significantly increased volatility after 1984 appeared in the third millennium, with a massive increase of a 543% price hike from 2002 to July 2008. Even from the vantage point of historical precedents, we could expect the sudden bolt of a downward trend in crude prices in July/August 2008, to be replaced with price hikes again.

Also, as Hirsch suggested above, volatility in prices is anticipated to increase around the time the world reaches peak oil production, and then subsequent declining production, which appears to be around now – hence violent swings both ways, up and down, are not unexpected. However, this price fluctuation will likely occur within a general trend of dwindling oil supplies leading to increasing scarcity and much higher crude prices.

The graph below illustrates the peaks and troughs of oil prices (with their associated world events) in the ups and downs since 1970, however, it is obvious that the strong general trend since around 2000 is a upward which was increasingly steep since around 2006.

Conclusion

A very strong largely sustained upward trend in oil prices is shown since around 2000. This trend, even though occasionally interrupted by a price retreat, due to world events and other circumstances, will likely continue and take oil prices to $200 or even $300 a barrel in the wake of world peak oil production already reached in 2006.

References

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James Leigh is Assistant Professor Cultural Geography at the University of Nicosia, Cyprus