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 18, 2008 | posted by Michael Baxter in Oil | comments (0) |

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.

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 26, 2008 | posted by Michael Baxter in Oil | comments (0) |

When Ken Livingstone was in New York a few years ago he was asked why London was doing so well.  He replied: “Two words, Sarbanes Oxley.”

London’s financial markets are not keen on regulation.  Okay, there is regulation, but it’s nothing like the draconian measures seen in the US.    And that is why London is such a success.

Sometimes it seems as if London’s unique selling point is US politicians.    They overreact so.   They put the kybosh on Middle Eastern investors buying US assets, so they buy British assets instead.    Enron and WorldCom go bust, so Congress imposes a straitjacket on US corporations.  The result: chances of another Enron are diminished, but then the money flowing into New York’s stock exchanges diminishes too, and it flows into London instead.

Of course this is not unique to US politicians.  Overreactions seem to be the way us humans do things.     Someone leaves the stable door open, the horse bolts, so Farmer Giles gets a new solid steel door, with a state-of-the-art security system, when all he really needed was a less-forgetful stable boy. 

But now, the focus is on oil speculators.     Are they to blame?  OPEC puts the high price of oil down to speculation.     In the US, senators are spitting feathers. And London is in the spotlight.

So, are speculators to blame for the price of oil?   And while we are busy blaming them for oil, why not see if we can think of some other things to blame them for, such as the price of food, the credit crunch, England’s failure to qualify for the European Championship, all that rain we have been having lately; oh, and why not blame them for sterling getting kicked out of the ERM in 1992. 

Sorry, I forgot.  These days, people seem to think the UK’s ejection from the ERM was a good thing.    George Soros, once vilified as the man who beat the Bank of England, is now a hero for hastening the day the UK was able to step out of the straitjacket that was the ERM.

Yesterday, on Capitol Hill, Daniel Yergin, who is one of the leading energy analysts throughout the entire US of A, spoke to the US Joint Economic Committee.  “In such circumstances as these, there is a tendency to seek a single explanation,” he said.  “History, however, demonstrates that changes of this scale and significance result not from a single cause, but rather from a confluence of factors.”

“Phew,” said the speculators, but then Mr Yergin added: “Financial markets are today playing an increasingly important role in price formation – responding to, accentuating, and exaggerating supply and demand, geopolitics and other trends… As prices go up, this psychology becomes self-reinforcing – at least until the market turns.”

Others put it more strongly.  London Metal Exchange Chief Executive Officer Martin Abbott told Bloomberg: “It would be very foolish of any government to stifle participation in markets.”  He added: “Why would an elected politician have a better idea of what the price is than the summation of the entire world’s oil industry trading across an open exchange?… For a government to try and determine a good price for something is nonsense.”

Writing in the FT, Martin Wolf was just as dismissive. He talked about this: “silly idea that price jumps [in] oil or food are the result of ‘wicked’ speculation’ – a fantasy promoted by dangerous populists across the globe.”

Writing in The Times, Carl Mortished said: “Those pilgrim puritans are at it again, threatening to ban, regulate and smother all forms of risk-taking. After adultery, booze, ciggies and online poker, Americans have invented a new vice and its home is New York’s Mercantile Exchange.”

Warren Buffett once said: “Financial derivatives are weapons of mass financial destruction.”   But futures markets also enable business people to insure against risk.

More to the point, speculators don’t lean against the wind.   They only bet on prices going up if they think underlying factors will drive price up. They only go short if they think there is a good reason for price to fall.

As such, they can provide a counterbalance to the rubbish put forward to vested interest groups.

If you had followed spread betting trends, you would have known the City expected a house price crash when the property industry itself was still saying prices would go up this year.

When the government tried to protect sterling’s unsustainable exchange rate, Soros knew it wouldn’t work. 
 
What do you do when there is bad news ahead?  Bury it?  Pretend it is not there?  That is what governments try to do. Speculators merely tell the truth, and they speak the truth with their wallets; and the truth is then there to anyone that wants to listen.

June 9, 2008 | posted by Michael Baxter in Oil | comments (1) |

It is just getting ridiculous.  Oil closed in on $140 over the weekend.    In fact, reports suggested it saw the biggest one-day hike ever recorded.  More reports have been published predicting oil will reach $200, claims we have reached peak oil are growing, and yet…

As we have argued before, at current prices, oil is unaffordable.   In the short-term, demand for oil is what economists call inelastic.  Demand is not affected by price. 

In the longer-term though, oil is just like everything else.  If price is too high, we find different way of doing things.  We buy fewer SUVs, and in the US, fewer pick up trucks, for example.

Furthermore, when something rises as fast as oil did over the weekend, then we are seeing the hallmarks of a bubble.    Bubbles burst.

Last week we told how across Asia, countries have been lowering oil subsidies – meaning consumers in India, Malaysia and other countries are now paying more for their petrol – this will result in falling demand.

But in China, the subsidies are still in place.  

According to Capital Economics: “China’s retail fuel prices are well below international levels. Consumers pay around 50 per cent more for gasoline in the US than they do in China, but the fiscal costs to China of keeping prices so low are still relatively small.”

In fact, Capital Economics calculates as follows: “If international prices remained at their current levels, and the price for all refined products was kept at the same discount to international prices, the implicit subsidy for the year as a whole would be in the region of $110bn, or 2.8 per cent  of GDP. 

However, the cost to the government is in fact less than that as: “The government has in effect been forcing the oil companies to subsidise their downstream refining, distribution and retail operations using revenue from upstream activities.”

As a result, Capital Economics believes the true cost to the Chinese government of subsiding oil is around 0.5 per cent of GDP.

Now normally, 0.5 per cent of GDP would be too much for most governments to bear.  But in a country that is growing by 10 per cent a year, and in a country that sees inflation as a threat to growth, a subsidy costing half a per cent of GDP is a small price to pay.

It is just that this can not carry on for ever.  China’s state-owned oil companies are losing money, sooner or later they will be unable to subsidise the prices they charge.  Furthermore, if oil does reach $200, then the cost to the Chinese government will be much higher.

The general feeling seems to be that China’s subsidies will stay unchanged until after the Olympics.

But if oil stays at current levels, or does indeed rise further, expect the subsidies to go, eventually. 

Then demand for the black stuff will soon plummet.

Calling the end to bubbles is notoriously difficult.  The bubble probably won’t burst this year, and probably won’t burst next year, but sooner or later it will.

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.

May 22, 2008 | posted by Michael Baxter in Oil | comments (1) |

The oil debate rumbles on.    Yesterday saw the release of the latest set of minutes from the Bank of England.  The recent inflation report from the Bank made the release of these minutes almost irrelevant.  We already knew it was worried about inflation, but that MPC member David Blanchflower wants to see rates slashed and the minutes just confirmed this – with the voting going 8-1 for rates staying on hold.  

But the really interesting bit was this paragraph:  “Speculative purchases did not seem to be the prime cause of the recent increases in the oil price. More fundamental demand and supply factors had probably been at the root of its steep rise during recent months and there remained considerable uncertainty about the oil price outlook.”

Meanwhile, in the US, oil company bosses were hauled up in front of Congress.

And the Senators roared their displeasure.    Top of the pride was Sen. Richard Durbin, D-Ill who said, “You have to sense what you’re doing to us – we’re on the precipice here, about to fall into recession…Does it trouble any one of you – the costs you’re imposing on families, on small businesses, on truckers?”

To which the oil chiefs said, “Hey, it’s not our fault, blame the Arabs – oh, and those environmentalists, blame them too… and the Chinese.”

Well, actually, they put it more diplomatically than that.

Robert Malone, who is both chairman and president of BP America Inc., said, “Today’s high prices are linked to the failure both here and abroad to increase supplies, renewables and conservation.”

John Hofmeister, president of Shell. put it this way: “The market is squeezed by exporting nations managing demand for their own interest [that’s the blame the Arabs bit] and other nations subsidizing prices to encourage economic growth [and that’s the Chinese].

Meanwhile, others said that if only they had been allowed to drill in Alaska and the Rocky Mountains, then there would be plenty of supply.

It seems that everyone is looking for someone to blame.

There is now a growing feeling that consumers of oil need to get together and negotiate in one block with OPEC.     And judging by comments we reported on yesterday, that includes the Chinese. 

In truth, though, we are seeing the grindings of an ancient wheel. Take as an example of this wheel the Arctic hares and lynxes.

In his book, Why Most Things Fail, Paul Ormerod told the story of how statisticians in Hudson Bay had observed a regular cycle in the population of these two species.   Further study revealed that when the population of hares in the region was high, the lynx thrived and its populace increased in size rapidly, until the predators were consuming hares faster than their long-eared prey was able to reproduce.  As a result a shortage of hares followed, and a greater effort was required by each lynx to catch its dinner.  In time, mass starvation of the lynx occurred, and its population fell rapidly, the hares then found little impediment to their own struggle for survival, until eventuality the cycle repeated itself.

The mistake these two creatures were making was that they were not seeing the big picture.    Each boom caused the next slowdown because they failed to take into account that the actions of individual hares and lynxes were being duplicated across the entire population.

Throughout the 1990s, oil was cheap – very cheap.   As a result, investment into oil exploration was low.    But, more seriously than that, investment into finding alternatives was low too.    The US buried its head in the sand over global warming – development of solar, wind, wave and tide power was held back.

Forget about fears over climate change, renewables only really hit centre stage when oil rose above $50 or so.

The period of cheap oil encouraged the use of those great big gas guzzlers we see on the roads – the SUVs.

This is changing. A couple of years ago, if you drove around in a 4-by-4 it  said this about you: that you were rich and successful. But now attitudes seem to be changing, and the perception of 4-by-4 is changing.   The likes of Jeremy Clarkson with their enthusiasm for burning rubber and noisy engines, seem a little passé.

In the US this change of attitude has manifested itself in the success of Toyota and the decline of GM, Ford and Chrysler.

When economists look at historical trends they often seem to forget how new things are.  Sure we can trace the price of oil back over 100 years now, but actually the world has changed so much over that period, that it seems unlikely there are many lessons to be drawn today on how oil behaved in the past.

The current pressures that are pushing up the price of oil are different to those that were in place in the 1970s.

But human nature and the laws of economics do not change.  Oil at $130 a barrel is simply unaffordable.   Countries which subsidise their oil will soon find this is just too expensive.

The only way oil will remain at current levels will be if the global supply of money expands and inflation soars – globally.

And the jury is still out on whether that is a real fear.