Oil refinery 1

The oil price jumped sharply today, why and what next?

To put things in context, the barrel price of West Texas Intermediate oil was $43.36 on November 11th. At the time of writing (6 am GMT, 12th December) it was trading at $54.04. So, that’s a roughly a 25% rise in just a few weeks.

There is a superficial and an underlying factor at play here.

The superficial reason is OPEC and certain non-OPEC members being nice and understanding with each other. After two years of disagreement, with Saudi Arabia and Iran at loggerheads, OPEC recently agreed to cut oil production by around 1.2 million barrels a day.

Now certain non-OPEC countries have agreed a 558,000 barrels a day cut.

The non-OPEC countries include Russia, Azerbaijan, Oman, Mexico, Malaysia, Sudan, South Sudan and Bahrain.

Note which countries are not on that list: US, Canada, UK, Norway – although Norway is not shedding any tears over the deal. Tord Lien, Norway’s minister of petroleum and energy, said: “The OPEC decision to reduce their oil production is beneficial for the world.”

It is curious; for years we were told that the global economy was being held back by the high price of oil, and then when we got what we wished for, namely much cheaper oil, we were told that it was a disaster for the global economy.

As a rule, it works like this: oil consuming countries tend to have a low savings ratio, and oil producers a higher ratio. So as the oil price falls, global savings – of which there has been an abundance for most of this century – should fall, and global consumption rise. So, cheaper oil should be good for the global economy.

Given this, it is especially worrying that economic performance has been so anaemic in the euro area and Japan when oil was so cheap.

But there are also deeper forces at play. All that OPEC and non-OPEC countries can do is ride with the tide.

When the oil price is high, investment into oil exploration and extraction rises, leading to higher supply – but this takes time, a lot of time. But the ultimate result of the surge in oil in the mid-noughties – with the price finally moving close to $150 in 2008, was fracking and the tar sands of Alberta, Canada. Consumers gradually changed behaviour, becoming more fuel conscious.

But oil has been cheap for two years, investment has risen, consumers are more relaxed about their use of energy, as a result, the oil price will rise, and no doubt pass $100, maybe $150 a barrel within a few years.