July 23, 2008 | posted by Michael Baxter in Oil | comments (1) |

Oil fell yet again yesterday, down to $127.75 on the New York Mercantile Exchange at the time of writing. It is now $17 lower than the price it reached on the 7th July. It seems unlikely oil has ever fallen so rapidly over such a short time frame.

The key question though is, are we seeing the bursting of the oil bubble or are we merely seeing normal market volatility? Consider this: oil may have fallen by $17, but in percentage terms it is down just by 12 per cent.

Evidence to support the argument that the price of oil has crashed comes in the shape of auto sales. According to yesterday’s Telegraph, European auto sales fell 7.9 per cent in the year to June, while US sales fell to their lowest level in 15 years. Chrysler saw year on year sales drop 36 per cent and, for the first time since England got knocked out of the World Cup by the Hand of God – Maradona, GM are not paying a dividend.

But, perhaps even more tellingly, in China, despite a 3 per cent fall in average car prices, the stock of unsold cars rose by 50 per cent on this time last year. It appears, even Chinese consumers, despite heavy gas subsidies, are feeling the oil pinch.

But, on the other hand, yesterday, billionaire oil investor T. Boone Pickens told the US Senate Homeland Security and Governmental Affairs Committee: “oil will hit $300 a barrel in 10 years,” unless the US reduced its dependence on overseas oil.

The falling pound and dollar are not helping, either. Every time the US and UK currencies fall relative to a basket of currencies, oil tends to rise in dollar terms and we feel the pain on both sides of the pond.

It has been argued here that oil at $130 is too expensive, far too expensive. Not only will oil at this price hurt the world’s great importers, that’s economies such as the US and UK, which in turn will impact on global trade, it will also hit the cost of trade. Goods that are sold overseas have to be transported.

These days trade is a complex web. Some countries make components, others assemble, the consumer products we enjoy in the West, imported from China, were not just made in China. A number of factories in different locations will have contributed. As oil moves up in price the cost of this practice will be hit hard.

Up to now there has been no sign of a major slowdown in world trade. In fact, recently the IMF upped its projections for economic growth for most major economies.

In the early 1970s, and then again 1980s, the world economy was brought to its knees before oil started to fall. The economic cycle surely hinges on boom and bust type patterns. Prices don’t tend downwards unless things are really dire. It took a combination of overpriced properties and a shortage of credit to bring the property market to its knees. House prices were overpriced for years, too.

This time around, oil is actually less important than before. In the West, oil makes up a lower percentage of our spending. Yet, while things are tough they are not desperate.

And that brings us to the big surprise in the current falls in the price of oil. Maybe it has come too soon.

If oil has peaked already, and we are seeing the correction, then this has been one of the shortest lived bubbles on record.

July 16, 2008 | posted by Michael Baxter in Oil | comments (0) |

From peak to trough oil fell by over $10 a barrel yesterday, and this morning when we took our daily reading stood at $138, that’s 6.8 dollar a barrel lower than the same time yesterday. (Prices from the New York Mercantile Exchange)

Admittedly, in early June oil was cheaper than this. For that matter, until five weeks ago the current price would have been an all-time record. Even so, these days we need to make the most of falls like this, and ask, is this the first stage in the fall in the price of oil to more sustainable levels?

The reasons given for yesterday’s price falls were manyfold. OPEC helped. Yesterday it said that thanks to the declining economic outlook, demand for oil in 2009 would be less than it originally estimated. But then again, it wasn’t much of a downgrade. It had previously expected global demand to rise by 1.28 per cent next year, now it thinks it will rise merely by 1.2 per cent. So, whoopee to that.

Ben Bernanke helped too. He helped by telling bad news. He said high energy prices are acting as a drag on the US economy, and limiting US households’ purchasing power. To which analysts looked up in surprise and “oh, hadn’t thought of that.”

George Dubya helped too. He wants to lift the ban on drilling for oil in coastal waters, although his decision has to be ratified by Congress. The ban that had been in place since 1990 when a certain George Bush senior was President.

The ban was implemented after the Exxon Valdez spillage disaster (was that really 18 years ago – ed), although has never applied to coastal waters in the Gulf of Mexico.

But then again, what difference will that make? It will take years before oil will actually flow, and in the US many were quite dismissive of the move. “If offshore drilling would provide short-term relief at the pump, or a long-term strategy for energy independence, it would be worthy of our consideration,” said a spokesmen for Barack Obama. “But most experts, even within the Bush administration, concede it would do neither.”

In fairness to George Dubya, who remember comes from Texas, the state of Dallas and JR Ewing, he was well aware of the time lag between lifting the offshore drilling ban and oil availability, but argued it would help lower the price of oil anyway, because when markets price oil they take into account future supply. Remember, the futures markets are supposed to discount future flow, which is why talk that we may or may not be approaching peak oil in a few years’ time is relevant to the price now.

There are, however, certain other factors that will have a much more significant impact on the price of oil over the next few years.

Firstly, there’s the slowing US and European economies. Surely, by reducing its estimate of how demand for oil will grow next year by such a small amount, OPEC has grossly underestimated the effect that oil at $130 plus is having on western economies.

At its current price, the price of oil is hurting, really hurting. It is inconceivable that western demand for oil will not fall dramatically over the next few years as a result.

But there are two other key factors too. One in favour of oil falling, one against.

The high price of oil will also hit international trade. China imports goods, does a bit to the goods it has imported, and then exports them. It is like that these days. The flow of trade is a hugely complex web, and the cost of transport is the key. If you like, transport is a little like trade’s bandwidth.

The cost of trade is in part determined by the price of oil, and in part due to other factors, such as containerization in which one global standard was defined for the size of all crates used for transporting goods. But as oil surges in price, this bandwidth will clog up. International trade will be hit. Global economic growth will slow, and demand for oil will fall.

But the other factor, that could work in the opposite direction, is the vulnerability of the dollar and sterling to further falls.

Both countries now have wafer-thin foreign reserves. As Ambrose Evans-Pritchard argued in the Telegraph this morning, if foreigners lose patience with the constant flow of profit warnings and losses coming out of western banks they may stop lending us money altogether. This could lead to big falls in our currencies. In the long term this may be no bad thing. In fact, it could be a very good thing, since it will help correct the global imbalances and enable the US and UK to expand through trade, rather than borrowing. But in the short term it will hit the economies hard, very hard.

If the dollar and pound fall much further, regardless of how much less oil we demand, the price of oil valued in dollars and sterling will continue to rise.

July 14, 2008 | posted by Michael Baxter in Oil | comments (1) |

Have you ever watched that Channel 4 TV programme Deal or No Deal? If you have, you may have realized that the probability that individual contestants will win the maximum £250,000 is different from the probability that the banker will give away £250,000.

The reason is this. Individual contestants play the game once. There are 22 boxes; one contains £250,000. There is a one-in-22 chance of them winning the big prize.

The banker, by contrast, knows that if he plays this game every day, and each contestant goes all the way to the end, he will give away an amount of money equal to the total sums of money available, divided by the amount of boxes – this is in fact £25,712.16 per contestant.

But for the contestant, playing the game just once, the odds are different. In fact, the contestant would expect to take away between £750 and £1,000, because there are exactly the same number of boxes containing money above these amounts as there are below.

The point of this anecdote is this: we are not good with probability. It is not something we intuitively understand

Take as another example, peak oil.

There are 1.2 trillion barrels of proven oil reserves in the world. That is enough at current consumption to last 40 years. But, according to Richard Pike, president of the Royal Society of Chemistry, this is a very misleading figure, and this is why.

Each oil company estimates proven oil reserves for each oil field. The reserve is defined as proven if the company has a 90 per cent confidence in its estimate for that field’s capacity.

So, the various authorities, such as IEA, which work out global oil reserves, take all these proven estimates for each field and add them together.

So that means there’s 1.2 trillion barrels of proven oil reserves. How confident can we be of this? Ninety per cent, right? Wrong. In fact the laws of maths would suggest that total reserves are likely to be much much higher than that. And the probability that is so, is much greater than 90 per cent too.

Why is that so? Well, actually, when you think about it, it is obvious. If you have a ten sided dice with numbers one to ten, you know there is a 90 per cent chance you won’t get, say, the number ten. But if you throw that dice ten times, the chances of getting ten tens is in fact 0.1 to the power of ten. An incredibly small number.

It is the same with proven oil fields. The chances that each and every oil field in the world does in fact only have this proven level of oil is tiny.

“Part of the oil industry is perfectly familiar with the way oil reserves are underestimated, but the decision makers in both the companies and the countries are not exposed to the reasons why proven oil reserves are bigger than they are said to be,” said Dr Pike.

But there is more reason to doubt all the predictions of gloom on the supply of oil. Oil flow is more a matter of infrastructure, such as refinery capacity, for example, than how much oil there is. Dr Pike says, “No matter how much oil you have in the ground, if you don’t have facilities, the limits to your production at any one time are constrained.” He said it is “like having an enormous tank with one tap.”

Dr Pike says oil flow may well peak soon, because we don’t have the facilities. Even so, he says, oil will be available for many years.

“The bad news,” says Dr Pike, “is that by underestimating proven oil reserves we have been lulled into a false sense of security in terms of environmental issues, because it suggests we will have to find alternatives to fossil fuels in a few decades…We should not be surprised if oil dominates well into the twenty-second century. It highlights a major error in energy and environmental planning – we are dramatically underestimating the challenge facing us.”

June 27, 2008 | posted by Michael Baxter in Oil | comments (0) |

Shokri Ghanem, chairman of Libya’s National Oil Corporation, put his spoke in.  The world is oversupplied with oil he said, and in any case, Libya is so put out by US action in Iran that it is considering reducing its supply of oil.   

So the day has come when Libya plans economic sanctions against the US.

Meanwhile, OPEC president Chakib Khelil, speaking on French television, said he thought the price of oil could hit $150 or even $170 a barrel.

And yet, more evidence emerged to suggest oil will fall back, eventually.

In the UK, bus and train company Stagecoach talked about a “Renaissance” on the railways.  The last year has seen a 3.6 per cent jump in the number of passengers using its buses, but more to the point, it enjoyed a 13.6 per cent rise in like-for-like sales on its rail franchisees.

Maybe Jimmy Savile was right: “This is the age of the train.”

Then, Morgan Stanley suggested the high price of oil could put an end to global imbalances.

The argument goes like this.    The Chinese and Indian growth story has been based on exports, which in turn have relied upon Western borrowing.

But, as the price of oil goes up, the cost of transporting goods rises too.  “In the short run, this is clearly a negative shock to Asia, and for Asian assets, including currencies,” said Morgan Stanley’s Stephen Jen.  “In the long run, however, this shock could accelerate the move away from exports.”

But surely Mr Jen’s argument has another implication.    Just as the high cost of petrol has been forcing us onto the buses and trains, it is also likely to lead to less flow of goods across the seas.

These are just two examples of why demand for oil is set to fall. 

There are plenty of other reasons too.  The fall in GM shares to a 33-year low yesterday, shows how much customers want fuel efficiency now.

Ironically, though, if energy producers believe oil is a bubble and will crash in price, they are less likely to spend money on ramping supply and on finding alternatives.   This will in turn keep price high. If they believe the high price of oil is here to stay, they will invest in alternatives and oil will then fall in price.

For that reason, oil in excess of $130 must appear to become entrenched, before it can fall.

Cycles are like that.    Booms go too far when people foolishly believe it can carry on for ever.  Crashes occur when people equally foolishly think there is no hope.

Yet, ironically, it is the foolishness of markets that creates innovation.    
 

June 23, 2008 | posted by Michael Baxter in Oil | comments (0) |

So, Gordon dropped in on OPEC this weekend.

After collecting his luggage from Jeddah airport he said, “There must be a new deal between the oil producers and consumers. I am going to make it absolutely clear that we are going to reduce our dependence on oil. I want the oil-producing countries also to diversify out of oil and I want us to get a more balanced energy market.”

But Chakib Khelil, the top man at OPEC said, “Asking OPEC member countries to increase their offer is illogical and irrational.”

But who is right?  Some recent data from the latest BP Statistical Review helps illuminate the true picture of the global oil business.

GB, of course, reckons it’s all down to supply not keeping up with demand; that OPEC needs to do more. If it doesn’t, goes the warning, the West will reduce its reliance on oil.

There’s no doubt, spikes followed by big crashes in the price of oil are hugely damaging to the global economy.  It is all very well Brown talking about ending boom and bust, if oil, the commodity that seems to underpin the global economy, goes through these regular peaks and troughs.

But then again, what can OPEC do?  Maybe we are just running out of the black stuff. Maybe we just can’t keep up with surging demand.  Maybe these subsidies which some developing nations are putting on oil is distorting the market.  Consumers in those countries are not making the cut-backs they should, because they are not paying the true market price for the black stuff.

That’s what GB thinks.  The subsidies in countries such as India and China “hurt the poor,” he said.

Saudi Arabia is responding to Gordon, and is putting a few hundred thousand more barrels a day into his begging bowl.

But the rest of OPEC seem unmoved.   OPEC’s Mr Khelil, by contrast, blames a shortfall in refinery capacity, speculation and geopolitical tension.

But what do the numbers say?

Last week, BP released its annual statistical review of the oil industry, and it makes a fascinating study.

First off, it is true that oil consumption is rising fast.  From 1968 to 2007, oil consumption doubled.     But has production kept pace?  Answer no, but it only lags behind by a whisker.  While it took 38 years for oil consumption to double, it took 39 years for production to double.  Supply lags behind demand, but by a tiny amount.

Secondly, what about peak oil?  Well, the world’s proven oil reserves  have jumped from 667 billion barrels in 1980 to 1237 in 2007.  So that is a fair rate of increase, and by the way, in percentage terms, much faster than the change in consumption.

More worryingly, between 2006 and 2007 both proven oil reserves and production fell – but only by a fraction.    It has happened many times before, so don’t read too much into the fall in one year.

And what about India and China?  Yes it is true, both have seen a massive rise in their consumption of oil.

Since 1965, India’s oil consumption has increased by about 11-fold.  In China, the increase was nearer 30-fold.  

The US, however, remains by far and away the world’s biggest consumer of oil.  In 2007, US oil consumption was around double the level in China.

Asia as a whole does, however, now consume more oil than the US, around half as much again, in fact.

We don’t need to tell you that the population of Asia is many times greater than the US, so oil consumption per capita in Asia is still tiny, compared to the US.

As for the UK, China’s consumption of oil overtook us in the mid 1980s, and India’s around ten years ago. Today, China consumes about four times more oil than us, and India about half as much again.

So what conclusions can we draw?

There is no doubt that the subsidies in Asia don’t help.  But, North America and what BP calls Eurasia, that’s Europe and much of the former Soviet Union, account for 52 per cent of global oil consumption in 2007.

The US accounted for 23.9 per cent.

A small reduction in demand in the US and Europe will have a big impact on the global balance between production and consumption.

Looking further forward, the key will be whether the slight dip in production and proven reserves seen in 2007 becomes a trend, or is a one-off. The answer to that question will determine the price of oil in the longer-term.

June 5, 2008 | posted by Michael Baxter in Oil | comments (2) |

The Honda Civic has the answer.     India Oil illustrates the threat.

In the US in May the biggest-selling auto was that fuel efficient car from Honda.  Available with a hybrid option, no less than 53,299 Civics were sold in the month, making it the best-selling car in the US.  It was the first time since 1991 that a pickup truck was not number one.

Yet the decline of the pickup does not stop there.  The Toyota Corollas and Camrys, and Honda Accord, all enjoyed greater sales too.

You know the reason why: it is the high price of oil.  US consumers want more gas per buck.

And yet in other countries, the full cost of higher oil is not yet being felt.

In India, for example, gas is a third cheaper than in the US, and as you know US gas is a lot cheaper than in Blighty.

According to Business Week, India Oil, the biggest oil refiner in India, is close to bankruptcy.  Why? Because the state owned company loses money every time it sells gas – and apparently India’s government-owned oil companies are expected to lose between them US$58.4 billion this year.

And that is why oil is staying high.  It is not just India, oil is subsidised in many countries throughout Asia, but there are signs it is changing.

In India the government has chosen to reduce its subsidies on oil by 11 per cent.  It’s not the first time this has happened, the government lowered subsidies in February too.

Indian oil minister Murli Deora said the government was “committed to protecting the interest of the common man as well as ensuring the financial health of the public-sector oil marketing companies.”

Mr Deora added, “Due to a relentless increase in international oil prices, it has now become absolutely necessary for the consumer, who is an important stakeholder, to also shoulder a small part of increased burden.”

But the move is hugely controversial.  Opposition spokesmen Rajiv Pratap Rudy said if an increase in fuel prices “… is inevitable, then the exit of the prime minister and his government is inevitable as well.”

But India is not alone.  In fact, the real fireworks came from Malaysia.  The government there is to increase gas prices by 40 per cent.  Malaysian Prime Minister Abdullah Ahmad Badawi said, “We cannot naturally keep subsidising at the current rate…We must reduce wastage. If we can change our lifestyles, we will not suffer a terrible situation…The long term plan is to increase … [gas] to market price.”

Indonesia, Taiwan, Pakistan and Sri Lanka have all taken similar steps recently.

But, for the time being, the dragon is not moving.    China can afford to stay put, at least for the time being, and it is thought there will be no relaxation of gas subsidies in China until after the Olympics.

We can complain about China, and there is no doubt the policy of subsidising oil introduces distortions into the market.  But frankly, the policy is not that different from the EU Common Agricultural Policy (CAP).  Okay, in China the idea is to help the consumer, CAP subsidies are there for producers.  But the two subsidies are equally damaging.

Of course, China is a wealthy developing country and has the luxury of being able to afford to do this.  In impoverished countries like the US and UK this option does not exist!

In reality, though, China remains a poor country.  It seems unlikely she can afford this subsidy indefinitely, and in any case, it is questionable whether it is really a good thing for the local economy anyway.

If the subsidy was lifted, the government could spend the proceeds elsewhere – and in time, this is surely what she will do.

But until then, the move to fuel-efficient cars in the US, and the reduction in tariffs in countries such as India and Malaysia, may just not be enough.

The likelihood is that the price of oil will only fall significantly when China lifts, at least partially, her gas subsidies. 

June 4, 2008 | posted by Michael Baxter in Oil | comments (0) |

Some people say it is, others say it isn’t.

Take Michael Waldron from Lehman.   He has authored a report titled “Oil dotcom”.   Ummm wonder what he thinks. 

Then there’s the  OECD chief – this is what he had to say: “The best solution to high oil prices is high prices, that way demand will fall.”

Meanwhile, the road to Damascus is getting busy.  George Soros, the man who consistently earns more than $1bn a year from his speculative activities, told the US Senate yesterday when he talked about commodity speculators creating a bubble in the oil market which could send the US into recession.

It was just one of many sojourns down this road.  In his recent book – which by the way is very heavy going, he talked about a “super bubble”.     Mr Soros believes that markets do not tend to correct, or ever reach any kind of equilibrium, but rather the actions of individuals create extreme volatility – leading to bubbles and crashes.

But in the Senate hearing, Mr Soros was not the most outspoken.     Mark Cooper, director of research for the Consumer Federation of America, said, ”Americans are suffering needlessly due to the financial bubble,” and then went on to blame US regulators.  “Just fire the commissioners and clean the problem up,” he suggested.

Soros, by contrast, reckons speculation is just part of the story. “The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality,” he said.

So where next for oil? Mark Cooper reckons only around a third of the current price of oil relates to its actual cost, another third relates to the actions of the OPEC cartel and the rest is down to speculation.

“I think that is an exaggeration,” said Soros.

Meanwhile, returning to Michael Waldron, there seems to be a snag with his theory.  While he likens the current activity in the oil market to the dotcom bubble, he says oil could fall to $90.

Now, to be frank, a fall to $90 is not that much.  After all, it broke $90 for the first time ever at the end of January this year, and way before then some were comparing oil to a bubble.

But maybe it is the OECD chief who hit the nail pretty close to its head.  “We can not allow the temporary slowdown in the world economy to distract us from something which is 20, 30 or 40 years from now the most relevant challenge that we have.   We don’t have to choose between saving the planet and not saving the planet.  We have means, we have the knowledge, the skills, we have the resources.  The cost of doing the right thing is a fraction of the cost of inaction.”

Okay, so what has all that got to do with the price of oil?  He was hitting out at those who want oil taxes cut, or subsidies put on. 

For as long as oil stays high, the attractiveness of developing alternative renewable sources of energy grows.   

The irony is this.  If businesses conclude the current hike in oil is a bubble, and will crash sooner or later, they will not commit sufficient resources to developing alternatives and, ironically, oil will stay high.

If people think oil at $120 or more is here to stay, they will put resources into alternatives, and in the longer-run price will fall.

Bubbles are like that.  In the short-term they are self-perpetuating, but in the long-term, bubble mentality leads to lower prices.

It is interesting, but if you look back through history, bubbles have often had a positive impact upon the economy.  The railway boom of the mid-19th century crashed, leading to depression, but the UK was left with a railway infrastructure that underpinned economic prosperity for a hundred years. 

In the US there was a boom in the laying down of telegraph wires, yet in the Crash, AT&T emerged, buying up cheap infrastructure and sowing the seeds for improved communication across the US – helping the economy transform from a developing to a developed country.

Google was able to buy up cheap server technology in the wake of the dotcom crash – even the Dutch tulip bubble left an industry that has lasted for centuries.

If you care about the planet, then the longer oil stays high, the better it will be in the longer-term.

June 2, 2008 | posted by Michael Baxter in Oil | comments (2) |

We all know oil is expensive.  But is it too expensive – can we afford oil at present levels, and if not, surely it will come crashing down soon, like it has always done in the past?

Maybe the key to this lies in how expensive oil is in comparison to previous levels.  Okay, it reached an all-time high over a year ago, but, after allowing for inflation, it was only last autumn that it passed the levels seen in the early 1980s.

But since then, it has gone on rising, so that today it is around 60 per cent up the 1980s level, even after allowing for inflation.

In the past when oil was so high, demand fell back.  In the US, you may recall, the government responded to one oil shock by reducing the speed limit – something which is still in place today.   We all started to look for more fuel-efficient cars – do you remember that TV ad showing how far a car could go on one gallon of petrol?

Today we are seeing signs of falling demand for SUVs, that’s why in the US the likes of GM and Ford are suffering, and Toyota, which read the signs so ably, is thriving. Mind you, even Toyota is feeling the pressure.  According to this morning’s FT, the Japanese car manufacturer is now considering downgrading its sales forecasts for the US – because even it over-estimated by how much sales of pick up trucks and other bigger vehicles were going to fall.

In the UK, recent data from HM Revenue & Customs on VAT receipts has indicated a year on year fall in the amount of petrol we have been consuming.

But there are reasons to assume we have not yet reached the point when the price of oil is so high, where demands starts to fall quite rapidly.

For one thing, in China, and certain other developing countries, oil is subsidised.  The Chinese consumer is not yet feeling the full cost of the rising price of oil.  The Chinese government is, of course,  because it is footing the bill associated with the subsidies.

It is not good.  When oil is subsidised the market is distorted.  Demand is not allowed to adjust the way it should.  But presumably, there will come a time when the cost of subsidising oil is just too high. At that time, demand, even in China, will start to fall.

But there is an even more significant reason why the price of oil may not yet be ready to begin its descent. 

As Hamish McRae pointed out in the Independent this morning, right now around 6 per cent of world GDP is spent on oil. This is a big increase on the percentage spent in the late 1990s and earlier this decade, but at the end of 1979 the proportion was higher – around 7 per cent of GDP.

But in this morning’s FT, John Authers in his daily video broadcast pointed out that according to data from Societe Generale, after allowing for inflation oil would need to rise to around $190 a barrel before the oil burden – that is to say the price of oil, times the amount consumed divided by GDP – hits the levels seen in the early 1980s.

And that really is a blow – because this data suggests oil might have further to rise before demand begins to fall sufficiently to bring price down.  Indeed, this is precisely what future markets seem to expect.

So the bad news, oil may well have higher to climb yet, it may even break the $200 mark, as some analysts predicted recently.  Furthermore, this run may have some time left in it.   Don’t expect oil to start falling back any time soon.

This means, of course, it will continue to exert inflationary pressure.

But, in the past, when oil did fall in price, it did so rapidly.  Remember, not so long ago, oil was a fraction of the current price – less than $20 a barrel.
 
No one is predicting oil will fall that low again – the global economy is just too large – but it will surely fall quite significantly in due course. 

The oil market displays all the hallmarks of a bubble, and remember, when bubbles burst prices tend to fall too low.

The key probably lies with how long it takes for oil to drop, and what happens in the meantime.   If we see a sharp rise in salaries, or if interest rates fall so low that the high price of oil becomes more affordable, or if governments fiddle around with subsidies or taxes, again reducing the cost of oil directly paid for by the consumer, then it will take longer for the price of oil to fall back.  

If, on the other hand, we tighten our belts; if we accept that oil is expensive, and deal with it as best we can – then the inevitable fall will be sooner.

That is why pain now is what is required.  The real inflationary danger from oil lies with the danger that we try to avoid the pain through artificial measures.  And that is what we need to watch out for.