Petrol Pump

The oil price has been surging and has now passed another key milestone.

 

When it comes to the oil price, there is a psychological level.  When it falls below that level it can be an indication that the price is crashing, when it rises above that level it can be an indication it is set to soar.

And that psychological level is $70 a barrel.

During the early years of this century, ioil was less than $30, it gradually began to rise, passing $70 in the mid-noughties, and then surged, moving close to $150 in 2008.

Post the 2008 finance crisis, it fell close to $30 again, picked up during the early years of this decade, passing $110 in 2013 and then crashed again in 2015.

The oil cycle is charged by time lags in demand and supply. When the price is high, it tends to oscillate around $100, and when it is low around $45. It can fluctuate up or down, but does not stray so far from these base prices.

It only tends to pass $70 in times of market transition.

And right now, Brent Crude is at $70 a barrel and for the first time since December 2014, when it was heading down.

There is more than one reason for recent rises in the oil price. An agreement between OPEC and Russia means less supply.

But there are deeper forces at play.  Thanks to the low oil price we have seen in recent years, investment has been low. Meanwhile, global demand is rising, manufacturing across the euro area, US and UK has been rising fast, in Germany industrial production increased by a stunning 3.4 per cent in November on the month before, and by 5.6 per cent, year on year.

The big unknown is shale gas, will US share gas companies react to oil north of $70 by ramping up supply, pushing back down on price?

But if recent history is any guide, the oil price should carry on rising.

Let’s say oil passes $100 within, say two years, what are the implications?

Well, inflation should rise, hitting household finances. This will not necessarily mean higher interest rates, since central bankers are meant to look beyond one-off drivers of inflation, such as changes in commodity prices. However, for other reasons, central bankers do seem to be in interest rate rising mode.

And that’s the worry. Increasing rates at a time of rising oil prices does feel a tad like a recipe for creating the next recession.