In April, the merchant bank Goldman Sachs warned that a ‘super-spike’ in oil prices might drive the cost of a barrel of crude up to $105, twice what they are at the time I’m writing this in early June. $105 would also be six times the average price between 1987 and 2000.
The bank referred to a ‘spike’ because prices could not stay at the $100 level for more than a few months without causing the collapse of the world economy. This would happen because we would all be spending so much more to buy our oil that we would be unable to carry on buying other things at the rate we do at present, particularly as the prices of other fuels would rise in step with that of oil.
As a result of the diversion of our spending, factories around the world would find they had spare capacity. They would lay off staff and cancel expansion projects and, as construction work is so energy intensive, its cessation would cause oil demand to fall rapidly. This is exactly what happened the last time its price went significantly above the $20 level in 1972 money. Millions of people would become unemployed and cut their spending to the bare minimum, causing other people to lose their jobs too. A global depression could develop in which the lack of activity in the world economy could cause the price of oil in today’s money to plummet from $100 back to around $15 a barrel again.
The cheap oil price would suit no-one because oil would be more expensive than ever for someone who had lost his or her job. Those people who still had the money to build or improve their houses or to run cars would see no reason to make them energy efficient and there would be no commercial incentive to explore for more oil or to develop renewable energy sources.
The oil producers would, of course, find the low prices ruinous. In the past the Saudis used to pump more oil whenever it was necessary to do so to keep prices from becoming excessive. This was to avoid a price spike developing and causing a global collapse. Unfortunately for the stability of the global economy, however, they don’t have the production capacity to do that any longer. They are already pumping as much oil as they can and their output is falling month by month because their oil fields are becoming exhausted.
No other country has enough unused capacity to pump much more oil than it is doing at present either so, if global demand continues to increase, prices can be expected to rise very sharply. A crisis could develop at the end of this year when world oil production of between 86 and 87 million barrels a day is expected to be some 2-4 million barrels less than the expected demand.
How quickly a world recession will set in after prices rise to the projected $100 is impossible to say. One unknown factor is how the world’s central banks would react to the widespread inflation that costly oil would undoubtedly bring. If central bankers try to cure the rising prices by pushing up interest rates to deter people from borrowing to spend, they would be removing money from the economies for which they were responsible at exactly the same time as those economies were haemorrhaging money to pay for their costly oil imports. In other words, if the central banks adopted their standard anti-inflationary strategy, they would give their economies a hefty shove into a global recession. The consequences for the construction sector would be dire.
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