Oil refinery (2)

The price of Brent crude oil has surged 8.5% passing $50 a barrel again. Is the oil cycle turning, asks Michael Baxter?

Brent crude also passed $50 last month, but then fell back. The point is that it has been passed this price twice in a few weeks, after 12 months of exceptional lows.

The oil cycle is a bit like an oil tanker. It turns very slowly. Are we seeing the start of a trend?

The latest rise was put down to OPEC. Khalid al-Falih, Saudi Arabia’s energy minister, said that OPEC was close to deal and that Saudi was closing the negotiating gap with Iran.

Reports suggest that OPEC is targeting cuts in oil supply of between one to 1.2 million barrels a day. But Mr al-Falih said that in any case the oil market is close to moving back to balance.

OPEC has not been able to agree on oil supply since the price plummeted just over two years ago.

But there is more to this than the politics within OPEC.

The oil cycle follows a pattern. When the price is high, oil companies invest in exploration, consumers look for way to economise, we see fuel efficiency becoming more popular among car buyers, we see more lofts getting insulated. It takes time to have an effect. And market watchers are fooled, they say the price will never fall back again, they talk about peak oil.

This time we have seen tar sands from Alberta throw up oil, and fracking, while at the supply end: solar roofs and more fuel efficient cars. Division within OPEC merely exacerbated the situation.

But when the price is low, investment in exploration collapses, consumers start buying bigger cars.

This time around the narrative about peak oil has been replaced by a narrative about peak oil demand. Others point to how fracking can be turned on and off rapidly such that when the prices falls output from fracking temporarily reduces, to be yanked up again as the price rises, stopping the oil price from shooting up, like it used to.

But the oil cycle will find a way to turn, don't be surprised if the oil price tops $100 by the end of the decade and $150 by 2022.

But look further forward and things may change. Advances in energy storage are rapid. Renewables are falling in price. The Internet of Things will promote greater efficiency. Beyond that, we may even see synthetic oil. The era where we get oil from the ground may only have ten to 15 years left.