oil

There is a real risk that the oil price will surge within a few years, creating massive challenges for consumers, warns the International Energy Agency.

The oil cycle rotates – it has done so for over a century. And this rotation is one of the most important economic forces there is.

When the price is high, oil companies plough their money into exploration and developing new projects such that after a few years, supply of oil rises. At the same time, consumers change habits. They focus on energy efficiency, they buy cars that are more fuel efficient, and in time demand falls. The combination of rising supply and falling demand leads to sharp falls in the oil price. And when the oil price is cheap, the opposite happens. Oil companies cut investment, consumers become less discerning in how they consume energy and supply falls, demand rises, and the price rise, until the cycle begins all over again.

And it happens over and over again.

In the 1970s, following the Arab oil embargo, the oil price shot up, and a troubled time followed for many western economies. The UK reacted by electing Margaret Thatcher, the US by electing Ronald Regan, and the respective economies did better. But was this due to Thatcherism and Reaganomics, or was it down to the shift in the oil cycle? By the 1980s, oil was cheaper, and the UK reacted to the oil crisis by investing in its own resource – the North Sea.

Oil was cheaper from the mid -1990s and early years of this century too, the UK saw its longest ever run of economic growth, but what effect did cheap oil play on creating the boom years?

But in the middle years of the last decade the oil price shot -up – approaching $150 a barrel in 2008 and then the global economy crashed. What effect did the oil price play in creating this crash?

But the US reacted to the high oil price by creating a new resource of its own –shale gas, and the oil price fell.

The economy is doing quite well now, too, and the oil price, in part thanks to shale gas, remains low – $53 at the time of writing.

But the International Energy Agency has released a report warning that unless we see a sharp rise in investment, the oil price will surge in a few years-time.

Neil Atkinson, one of the authors of the report said: “In 2015 and 2016 investments in the upstream oil industry has been at record lows. It’s not recovering significantly in 2017.”

Is the International Energy Agency right, and if so what effect will this have on the economy? History says it is right, and history tells us that the effect on the economy will be negative – very negative.

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