The oil price is back on the rise – hitting 18-month highs on both sides of the Atlantic this week, and sparking a flurry of predictions that it will be back at $100 per barrel before the end of the summer. West Texas Intermediate peaked at $87.09 per barrel in intraday trading in New York yesterday, and in London Brent Crude hit $86.63.
Such prices may not seem extravagant in comparison with the $148 high at the height of the pre-crisis commodities boom in July 2008. But they are oil's highest levels since October 2008, and the culmination of an 8 per cent spike over the past 10 days. And although both prices slipped back slightly yesterday – to around $86.72 in New York and to $85.57 in London – the prices are still comfortably outside of the $70-$80 range that has dominated since last October.
Oil has been gaining steadily since mid-February thanks to rising activity in both the US and fast-growing Asian economies. The immediate cause of the most recent spurt also appears obvious: economic data from the US – the world's largest oil market – last week showed job creation running at its fastest rate for three years and the service sector is expanding at its fastest since 2006.
But such sharp rises nonetheless set analysts and economists a-flutter over the implications for the tentative global economic recovery if oil climbs back up to $100 per barrel as some are forecasting.
The role of speculators in pushing up prices is central to expectations of what happens next. There is a strong case that the last week's rally has a lot to do with traders backing the oil price to climb further.
Despite putative rising demand, the situation in terms of physical supply is far from constrained. Yesterday's slight dip in closing prices was widely understood as an acknowledgement that there is no fundamental imbalance between supply and demand. And figures from the US Energy Information Administration on Wednesday are expected to show a tenth consecutive week of rising crude stocks, which is a key indicator for short-term price improvements.
"We're seeing a speculative push driven by benign economic news from the US," David Hunter, an analyst at the energy consultancy McKinnon and Clarke, said. "But the underlying demand-and-supply situation doesn't warrant a bull run to $100." Even if short-term speculative price movements push the price up past the psychological barrier of $100 per barrel in the short term, the fundamentals will drag it back down to the $70-$80 again, Mr Hunter says.
The question is the impact of a return to $100 oil, even in the short term. When crude hit its eye-watering highs in the summer of 2008, there was only marginal negative impact in terms of inflation and recession because economic growth was still sufficiently strong to sustain it. This time around, there are the barest green shoots in the global economy and widespread concerns remain that the withdrawal of fiscal stimulus measures will tip some back into recession.
Rising oil prices will certainly not help. "If the global economy is still fragile, higher oil prices are adding to all sorts of other issues such as high levels of debt, constraints on credit, high inflation and tightening fiscal policies," Jonathan Loynes, chief European economist at Capital Economics, said. "Higher prices are not good for recovery prospects because they will act as a further squeeze on spending power, at a time when profits growth in companies and household spending power are still weak."
Developed economies rely less on oil than they used to, so the inflationary impact may be containable – although in the UK petrol prices currently account for 0.8 per cent of the 3.0 per cent rate of inflation. But in developing economies, which are currently powering global growth, the fallout may be more serious. "In developed economies the proportion of oil in overall consumption is relatively low so it is less of a factor in terms of inflation, and economic recovery," Yael Selfin, the head of macro consulting at PricewaterhouseCoopers, said. "For developing economies it is more of an issue."
The effects of rising oil prices are already being felt by British consumers. Petrol prices have breached the record 119.7p per litre reached in July 2008 in some parts of the South. And although the national average is still slightly shy at 119.46p, the AA says that it is only a matter of time. Part of problem is tax. Duty was bumped up by another 1p to 57.19p per litre on 1 April – the fourth rise in 18 months, with another two still to come.
But the oil price is also a factor, and the impact is exacerbated because any rises in dollar-denominated oil hit British drivers twice as hard once translated into weak sterling.
According to the AA, motorists are already cutting back. Petrol sales dropped almost 10 per cent in the last quarter of 2009. And two-thirds of families are restricting their car use – a higher proportion than in the crisis-hit confusion of November 2008. "Over the weekend, some retailers who put prices up 2p a litre, in line with the increase in duty and other costs, brought them back down," Edmund King, the AA president, said yesterday. "Such is the knife-edge between what drivers can and cannot afford to spend on fuel."
Elsewhere, the impact is less marked because the traditional link between oil and gas prices has been broken, at least in the short term. In the aftermath of recession – with manufacturing still weak and a glut of available gas – energy bills are not expected to rise, whatever the oil price does. "Gas and electricity prices are showing no sign of doing anything but going down at the moment," Joe Malinowski, the founder of price comparison website TheEnergyShop.com, said.
Despite recent cuts from energy retailers, bills have still only come down by around 10 per cent from their peak, compared with a 60 per cent drop in wholesale prices. So even if rising oil prices were to push through into the wholesale gas market, the impact would be minimal. "Bills are still high relative to wholesale prices, so even if wholesale prices did jump up there is still no knock-on to standard prices because there is such a gap between the two," Mr Malinowski said.Reuse content