Jeremy Warner's Outlook: The oil price will eventually return to earth, but collateral damage is likely to be serious

Here are a few reasons for not feeling too depressed about the ever-rising oil price, and a few others for being very worried indeed. For anyone who cares about the environment, high prices are obviously a potential force for good as they oblige consumers to treat fossil fuels as a scarce resource and either use less of them or seek out alternatives.

If I can't appeal to your altruism in thinking high oil prices a welcome development, then there is at least some comfort to be taken from the fact that the present elevated cost of oil is almost certainly not permanent. As the world economy slows, the best guess remains that oil and other commodity prices will follow the usual cyclical pattern of eventually falling back to more affordable levels.

Admittedly, these "normalised" prices are likely to be a lot higher than in previous cyclical downturns. Growing demand for energy from the developing world underpins a higher base price than historic norms. Energy usage in the United Arab Emirates is for instance doubling every five or six years. In the regions of mass population, such as China and India, it has also been rising strongly.

Yet whatever the demand/supply dynamic, there comes a point in all markets when price reaches the limits of the economy's capacity to pay. It's already happened with housing in America, Britain and many parts of Europe, where the same arguments about insatiable demand on limited supply as are now deployed by bulls of the oil price were once used to explain and justify ever-rising real estate prices.

As we now know, a large part of the house price spiral was down simply to a ready supply of cheap credit chasing an asset which everyone thought immune to Newton's law of gravity. As a consequence, ever greater quantities of money were poured into the market, until it eventually became essentially unaffordable. Prices are now correcting accordingly. Many of the same bubble characteristics are observable in the commodity markets, and particularly the oil price.

In the last year, the oil price has nearly doubled, a rate of appreciation which in absolute terms is without precedent. Admittedly, the oil shocks of the 1970s were in proportionate terms much worse. In the first of these shocks, the price quadrupled and in the second it doubled again.

Yet even accounting for inflation, the price today is much higher than it rose to back then. The effect, given the short time frame of the appreciation, could therefore be just as profound.

Western economies will be better at absorbing these increases than they were back then. Europe in particular is partially protected by the strength of the euro, which means the effective appreciation for single currency members is only half as much as it is in the US. All the same, the pain is already acute, with energy-intensive industries such as airlines facing profound structural change as they seek to adapt to expensively priced oil.

Though the focus of attention has been on the damage done to the full service airlines, the first casualties in the airline industry are likely to be among the low-cost operators, which rely on highly price-conscious customers. What's more, already finely tuned cost structures make it harder for them to absorb high fuel prices by economising elsewhere.

As energy and fuel bills rise, consumption is likely to suffer across the board, threatening a return to the "stagflation" of the 1970s. Even so, the West isn't as dependent on oil as it was back then and, as I say, per capita consumption of energy in the developed world is already so high that it can easily be reduced without causing undue hardship.

The pain caused in the developing world is, on the other hand, likely to be much more extreme. Here there is little room for reduced energy consumption. As higher energy and food prices eat into already squeezed family budgets, there is the threat of serious economic and social dislocation.

Yet the bull case for the oil price depends on this demand continuing to rise in an almost exponential way. In fact, very little has happened to the mix of supply and demand over the last year which in itself would justify a doubling of the oil price. What has changed is the willingness of markets to believe that growing demand underpins a permanently higher oil price. As with housing, that's likely to be only partially true.

As with all bubbles, it is impossible to know when prices will correct. The oil price could as easily go to $200 a barrel before once more returning to earth. Yet return it certainly will if it succeeds in pushing the global economy into recession. Central bankers seem to be succeeding in insulating their economies from the worst effects of the credit crisis. They may find the oil price an altogether tougher nut to crack.

Start your day with The Independent, sign up for daily news emails
Sport
Brendan Rodgers is confident that Sterling will put pen to paper on a new deal at Anfield
footballLIVE: Follow all the latest from tonight's Capital One quarter-finals
Voices
Lucerne’s Hotel Château Gütsch, one of the lots in our Homeless Veterans appeal charity auction
charity appeal
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
PROMOTED VIDEO
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Voices
Jimmy Mubenga died after being restrained on an aircraft by G4S escorts
voicesJonathan Cox: Tragedy of Jimmy Mubenga highlights lack of dignity shown to migrants
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Life and Style
tech
News
Not quite what they were expecting
news

When teaching the meaning of Christmas backfires

Arts and Entertainment
Angelina Jolie and Sony Pictures co-chairman Amy Pascal at the Golden Globes in 2011
film
News
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Ashdown Group: Java Developer - North West London - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Selby Jennings: Corporate Communications & Marketing Specialist – Geneva

120,000 - 150,000 chf + bonus: Selby Jennings: A leading Swiss Private Banking...

Day In a Page

Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum
France's Front National and the fear of a ‘gay lobby’ around Marine Le Pen

Front National fear of ‘gay lobby’

Marine Le Pen appoints Sébastien Chenu as cultural adviser
'Enhanced interrogation techniques?' When language is distorted to hide state crimes

Robert Fisk on the CIA 'torture report'

Once again language is distorted in order to hide US state wrongdoing
Radio 1’s new chart host must placate the Swifties and Azaleans

Radio 1 to mediate between the Swifties and Azaleans

New chart host Clara Amfo must placate pop's fan armies
Homeless Veterans appeal: 'It's life, and not the Forces, that gets you'

Homeless Veterans appeal: 'It's life, and not the Forces, that gets you'

The head of Veterans Aid on how his charity is changing perceptions of ex-servicemen and women in need
Torture: It didn't work then, it doesn't work now

Torture: It didn't work then, it doesn't work now

Its use is always wrong and, despite CIA justifications post 9/11, the information obtained from it is invariably tainted, argues Patrick Cockburn
Rebranding Christmas: More public bodies are refusing to give the festival its name for fear of causing offence

Rebranding Christmas

More public bodies are refusing to give the festival its name for fear of causing offence. They are missing the point, and we all need to grow up
A Greek island - yours for the price of a London flat

A sun-kissed island - yours for the price of a London flat

Cash-strapped Greeks are selling off their slices of paradise
Pogues could enjoy fairytale Christmas No 1 thanks to digital streaming

Pogues could enjoy fairytale Christmas No 1 thanks to digital streaming

New system means that evergreen songs could top the festive charts
Prince of Wales: Gruff Rhys on his rock odyssey, and the trouble with independence

Prince of Wales: Gruff Rhys

He is a musician of wondrous oddity. He is on a perpetual quest to seek the lost tribes of the Welsh diaspora. Just don't ask Gruff Rhys if he's a national treasure...