Oil: Up to $200 or Down to $25?

It is worrying for oil producers when the Russian President Dimitri Medvedev talks of $150 oil because it is so reminiscent of the $250 a barrel forecast last summer. A little hubris often comes before a fall.


Oil got down to $33 a barrel last December. Could another fall be on the cards this autumn?

Two things drive the oil market: speculation and fundamentals. It has been the speculators who have taken over the market since December and ramped oil prices back up despite the fundamentals of the worse recession since the Second World War.
Inflation

It is almost as though government bailout and stimulus money has been redirected back into the oil markets to cause this primary inflation. Well, it certainly could be that cheap money from the Fed has been put to good use gambling on rising oil prices.

The problem surely is that this surge in oil prices is self-defeating. Let us not forget that it was the spike in oil prices to $147 last July that preceded the collapse in financial markets last autumn. Oil prices and recessions have long been close associates.

As oil prices rise that places an additional cost burden on industry, transportation and consumers. And the impact is huge. The recent oil price rises could well have entirely offset all the global bailouts and stimulus packages since last autumn.

Indeed, surely here we can see the cause of the next down leg in this Great Recession. Oil prices are a tax on the global economy that it can not afford to bare, and demand will tumble as a result.
Horrific impact

British Airways has warned of a ‘fight for survival’ because of higher fuel prices on top of a global slump, energy prices will also go up for consumers already saving more and so they will spend even less and industry will struggle to pass on the additional cost, hitting profits.

Are higher oil prices therefore unsustainable in the short term? Will speculators then rush for the exit and drive prices down even below levels seen last December?

It certainly seems possible, even likely. For oil producers then only compensation is that this false recovery shows just how well prices are going to perform one day when a real recovery arrives as it must in due course.