July 18, 2008 | posted by Michael Baxter in Oil |

The key to how the economic crisis of 2008 will end surely rests with the price of oil falling, and maybe depends on the speed at which asset prices adjust. In the early 1990s the housing market collapse was painfully slow.  Agony was poured on more agony for years. It is possible that, this time around, the falls will occur much quicker; this will be a good thing. As it were, getting the bad news over with as quickly as possible.

As for oil, we have been predicting sharp falls in the black stuff for some time. $130 a barrel or more is just too expensive. People can’t afford it at that price. It is surely inconceivable oil can stay at that level for a sustained period, which is why we have predicted oil falling back to $70 before the end of 2010.

But, the last few days have already seen startling falls in the price of oil, down from $145 to $130 in three days. Is this the fall we predicted?

If so, then all of a sudden it looks like the IMF’s optimism yesterday, see story above, may be underdone.

It is just that we doubt this is so. The fall we are seeing now is too soon. It will take time before the high price of oil takes its true toll, before we all start driving around in Kas and electric cars, and SUVs start bringing back memories of the Dodo. It will take even longer before we see any meaningful availability of energy generated from renewable sources.

In a way, we hope the oil slide seen over the last few days is just temporary. If this is the start of something bigger, the real structural changes that are required in the longer term will not have been given time.

Of course, actually, the scenario described above is the precise opposite of what OPEC wants. If OPEC has any sense at all it will ramp up oil supply as fast as it can. The Saudis already appear to be doing this. We are not so sure, though, that this move would be in western interests, or indeed the interests of the developing world, in the longer-term. And we say this purely on an economic basis, without even considering climate change.