Rocks for the long run

The Economist has a look at long term commodity price trends - Rocks for the long run.

Long-run rises have been most pronounced for commodities that are “in the ground”, like minerals and natural gas. Energy commodities especially have boomed, soaring by roughly 300% since 1950. Prices of precious metals have also risen, as have industrial ingredients like iron ore. In contrast, prices for resources that can be grown have trended downwards (see chart). The inflation-adjusted prices of rice, corn and wheat are lower now than they were in 1950. Although the global population is 2.8 times above its 1950 level, world grain production is 3.6 times higher.

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Oil Price Update

Stuart at Early Warning has an update on oil prices - the rumoured glut of energy hasn't made itself apparent on the charts thus far - Oil Prices.

A while since we've looked at oil prices around here. The chart above shows the two main benchmarks - Brent and WTI - and the spread between them. These days Brent is a better indicator of global oil market conditions, as well as gas prices on the US coasts, while the spread of WTI to Brent is mainly measuring the fact that the boom in tight-oil production in the central US cannot be fully bought to market conveniently yet.

Brent prices have been in and around the $100-$120/barrel band since the beginning of 2011. For the last few months they've been rising and are currently somewhat above the 2011-2013 average. If the supply flatness of 2012 continues, I'd expect them to climb quite a bit more. However, it's not clear to me whether that supply flatness will continue.

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Gasoline at Highest Price Ever for This Time of Year

CNBC reports that US petrol prices don't seem to be reflecting all the reports we are hearing about US energy independence being just around the corner - Gasoline at Highest Price Ever for This Time of Year.

U.S. drivers are now paying more to fill up their gas tanks than they ever have at this time of year. The national average price of retail gasoline posted its biggest one-day increase in 23 months on Friday, rising four cents to $3.46 a gallon, according to AAA. The average price has risen 13 cents -- a 4 percent increase -- in the past week.

Gasoline prices have followed in part the climb in the stock and oil prices. Oil and equities have risen sharply over the last few weeks, as the Dow Jones Industrial Average reached 14,000 for the first time since 2007, Brent crude oil futures hit at 4-month high near $117 a barrel, while the U.S. oi lprice is near $98 a barrel.

Retail gasoline prices have also hit a new milestone. "This is the highest price record for February 1st," says OPIS analyst Tom Kloza, who predicts the national average price of regular gasoline will climb a few more pennies to $3.50 a gallon this weekend.

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Oil Espionage: Traders Spy on Oklahoma Hub With Satellites, Sensors and Infrared Cameras

NPR has a look at the lengths people will go to understand oil supply dynamics at Cushing, Oklahoma (which drive the WTI price) - Oil Espionage: Traders Spy on Oklahoma Hub With Satellites, Sensors and Infrared Cameras.

The bottleneck of crude stored in Cushing, Okla., has become the country’s “biggest bank vault of oil,” Businessweek’s Matthew Phillips writes. And it’s only getting bigger.

The clog — which is pushing down the price of West Texas Intermediate crude from Oklahoma, creating a gap with its international rival, Brent — is making traders rich.

Information is everything, and traders are using high-tech extremes to extract data about oil storage and flow from the high-security oil hub. Photographers in helicopters? That’s relatively low-level when it comes to these storage tank spy games, Businessweek reports:

Recently, photographers have started using infrared cameras to peer inside the tanks. The difference in heat can often show where the oil line is.

Aerial photography is common. A bird’s-eye view allows analysts to estimate storage levels by calculating the angle of shadows cast by massive tanks’ floating roofs.

And that’s just the beginning.

A private “energy intelligence” company called Genscape is funding much of the high-tech surveillance, reports Businessweek, whose parent company — Bloomberg — also does their own Cushing surveillance by way of twice-weekly satellite flyovers.

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How High Oil Prices Will Permanently Cap Economic Growth

Bloomberg has an article by Jeff Rubin arguing that high oil prices cap economic growth ("permanently" - though I'd argue its really until we reconfigure our economies to be based on renewable energy) - How High Oil Prices Will Permanently Cap Economic Growth.

For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies.

The countries guzzling the most oil are taking the biggest hits to potential economic growth. That’s sobering news for the U.S., which consumes almost a fifth of the oil used in the world every day. Not long ago, when oil was $20 a barrel, the U.S. was the locomotive of global economic growth; the federal government was running budget surpluses; the jobless rate at the beginning of the last decade was at a 40-year low. Now, growth is stalled, the deficit is more than $1 trillion and almost 13 million Americans are unemployed.

And the U.S. isn’t the only country getting squeezed. From Europe to Japan, governments are struggling to restore growth. But the economic remedies being used are doing more harm than good, based as they are on a fundamental belief that economic growth can return to its former strength. Central bankers and policy makers have failed to fully recognize the suffocating impact of $100-a-barrel oil.

Running huge budget deficits and keeping borrowing costs at record lows are only compounding current problems. These policies cannot be long-term substitutes for cheap oil because an economy can’t grow if it can no longer afford to burn the fuel on which it runs. The end of growth means governments will need to radically change how economies are managed. Fiscal and monetary policies need to be recalibrated to account for slower potential growth rates.

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The Pricing of Crude Oil

The Reserve Bank has an interesting analysis of how crude oil is priced in world markets - The Pricing of Crude Oil.

Arguably no commodity is more important for the modern economy than oil. This is true in terms of both production and financial market activity. Yet its pricing is relatively complex. In part this reflects the fact that there are actually more than 300 types of crude oil, the characteristics of which can vary quite markedly. This article describes some of the key features of the oil market and then discusses the pricing of oil, highlighting the important role of the futures market. It also notes some related issues for the oil market. ...

The crude oil market is significantly larger than that for any other commodity, both in terms of physical production and financial market activity (Table 1).

The value of crude oil production is more than twice that of coal and natural gas, 10 times that of iron ore and almost 20 times that of copper. Crude oil is the most widely used source of fuel, supplying around one-third of the world’s energy needs. It is also used to produce a variety of other products including plastics, synthetic fibres and bitumen. Accordingly, changes in the price of crude oil have far-reaching effects.

The pricing mechanism underlying crude oil is, however, not as straightforward as it might appear. Almost all crude oil sold internationally is traded in the ‘over-the-counter’ (OTC) market, where the transaction details are not readily observable. Instead, private sector firms known as price reporting agencies (PRAs) play a central role in establishing and reporting the price of oil – the two most significant PRAs being Platts and Argus Media. ...

While physical crude oil can be purchased from organised exchanges by entering into a futures contract, only around 1 per cent of these contracts are in fact settled in terms of the physical commodity. Futures contracts are standardised contracts traded on organised exchanges, specifying a set quantity (usually 1 000 barrels) of a set type of crude oil for future delivery. The two key oil futures contracts are the New York Mercantile Exchange (NYMEX) WTI light sweet crude and the Intercontinental Exchange (ICE) Brent contracts. ...

With so many different grades of oil, there is actually no specific individual market price for most crude oils. Instead, prices are determined with reference to a few benchmark oil prices, notably Brent and West Texas Intermediate (WTI) (Graph  3). Brent is produced in the North Sea and is used as a reference price for roughly two-thirds of the global physical trade in oil, although it only accounts for around 1 per cent of world crude oil production (Table 3). WTI is produced in the United States and has traditionally dominated the futures market, accounting for around two-thirds of futures trading activity. However, futures market trading in Brent has increased significantly in recent years to be now close to that for WTI, reinforcing Brent’s role as the key global benchmark (Graph 4). As discussed below, Brent’s dominance as a benchmark has benefited from the fact that it is a seaborne crude and, unlike WTI (which is a landlocked pipeline crude), can readily be shipped around the world.

These benchmarks form the basis for the pricing of most contracts used to trade oil in the physical (and financial futures) markets. For oil transactions undertaken in the spot market, or negotiated via term contracts between buyers and sellers, contracts specify the pricing mechanism that will be used to calculate the price of the shipment. So-called ‘formula’ pricing is the most common mechanism, and it anchors the price of a contracted cargo to a benchmark price, with various price differentials then added or subtracted. These price differentials relate to factors such as the difference in quality between the contracted and benchmark crude oils, transportation costs and the difference in the refinery’s return from refining the contracted and benchmark crudes into the various petroleum products. For example, a barrel of Brent is generally worth more than a barrel of Dubai (a  medium sour crude oil) because Brent will yield more high-value gasoline, diesel and jet fuel than Dubai without the need for intensive refining. However, the actual magnitude of the Brent-Dubai spread will depend on the relative prices of these petroleum products at the time when the oil is sold to the refineries, along with the location and the spare capacity in those refineries that can easily convert lower-quality crude oil into higher-yielding petroleum products. Reflecting changes in these fundamental determinants, the Brent-Dubai spread has fluctuated within a range of around US$0–15 per barrel. These benchmark prices used in formula pricing are usually based on either (i) ‘spot’ prices determined by PRAs (for example, a ‘spot’ price published by Platts called Dated Brent); or (ii) prices determined in futures markets (for example, the assessed WTI price published by the PRAs).

Oil companies often reference more than one benchmark price depending on the final destination; for example, Saudi Aramco typically employs the Brent benchmark to price oil exports to Europe, Dubai-Oman for exports to Asia and the Argus Sour Crude Index for exports to the United States. These particular crudes emerged as benchmarks due to several distinctive characteristics. Brent developed as a benchmark owing to favourable tax regulations for oil producers in the United Kingdom, in addition to the benefits of stable legal and political institutions (Fattouh 2011). Ownership of Brent crude oil is well diversified, with more than 15 different companies producing it, which helps to reduce individual producers’ pricing power.

Brent can also be used by a variety of buyers, given that it is a light sweet crude oil that requires relatively little processing. The physical infrastructure underlying Brent is also well developed. When the Brent benchmark was established in the mid 1980s, its production was initially reasonably large and stable, which is an important characteristic of a benchmark as it guarantees timely and reliable delivery. Although the volume of Brent crude oil produced has declined over time, three other North Sea crudes have been added to the Brent benchmark basket over the past decade, such that it now comprises Brent, Forties, Oseberg and Ekofisk (BFOE; Graph  5). The combination of these four alternatively deliverable grades has allowed the Brent benchmark to retain a reasonable volume of production. And while there are concerns about the adequacy of production volumes in the future, the depth and liquidity of the Brent futures market has nevertheless increased noticeably in recent years.

If alternative crude oils cannot be delivered against a benchmark, declining production volumes can weaken the status of that crude oil as a benchmark. This is because it becomes a less accurate barometer of current supply and demand as it becomes traded less frequently, and lower traded volumes enable individual market participants to influence the price more easily. Malaysian Tapis – which was previously a key benchmark for the Asia-Pacific region – is a case in point. Tapis’s benchmark status has faded away in recent years owing to declining production volumes; recently, only a single cargo of Tapis has typically been available for export each month, down from around 8 cargoes per month in previous years.

This compares with around 45 cargoes per month currently for the Brent benchmark. Declining production volumes, coupled with the absence of any alternative similar crude oils produced in the region, have seen refiners and producers shift to benchmark against other prices, predominantly Brent.

The emergence of WTI as a benchmark was also assisted by the presence of secure legal and regulatory regimes in the United States. WTI was established as a benchmark in 1983 and its status increased in prominence as the depth and liquidity of its futures contract expanded. Like Brent, WTI is a light sweet crude that is available from a broad range of producers. Similarly, several different types of crude can be delivered against the WTI contract, including sweet crudes from Oklahoma, New Mexico and Texas, as well as several foreign crude oils. WTI crudes are delivered via an extensive pipeline system (as well as by rail) to Cushing, Oklahoma.

Recently, however, the system has struggled to cope with the increasing volumes of crude oil flowing through Cushing. This has resulted in persistent inventory bottlenecks, owing to Cushing’s limited storage capacity and its landlocked location. These bottlenecks have weighed on the WTI price in recent years, to the point where it is now significantly influenced by local supply and demand conditions, in addition to those for the world as a whole (as indicated by the divergence between WTI and Brent oil prices shown in Graph 3). This has weakened WTI’s status as a global benchmark. ...

Given that oil prices are essentially jointly determined in both the physical and financial markets, it is no easy task to disentangle the effect of each market in the price discovery process with any precision. Nevertheless, futures markets appear to play an important role in the pricing of oil, perhaps more so than for other commodities. Indeed, there is a view that crude oil price levels are essentially determined in the futures market.

This is clearest for WTI where PRAs identify the ‘physical’ price directly from the deep and liquid futures market, and where there is no significant parallel OTC market. It is less obvious, however, for Brent. While Brent forward prices are typically used by the PRAs to derive the Dated Brent price, as noted above Brent forward and futures markets are directly linked via EFPs. Many large oil market players reportedly hold Brent forwards and futures in their portfolios, arbitraging between the two instruments, such that the prices of Brent futures and forwards typically converge.

The complexity of the oil pricing arrangements makes it difficult to demonstrate convincingly that benchmark oil prices fully reflect physical supply and demand conditions rather than the actions of uninformed financial speculators. Nevertheless, movements over time in the price differentials for the various benchmark crudes are broadly consistent with changes in demand and supply. The Brent-WTI spread provides a good example of the influence of such factors on oil price differentials (Graph 6). Prior to 2011, Brent and WTI prices generally moved in tandem, with the spread largely reflecting the costs of transporting Brent-referenced crude oils to the United States. In recent years, however, increased volumes of crude oil from North Dakota and Canada have flowed into Cushing, leading to a build-up in inventories. Most pipelines flow from the rest of North America into Cushing, making it difficult to move the extra crude oil out of Cushing. This has led to persistent inventory bottlenecks, which have weighed heavily on the price of WTI over the past 18 months, leading the Brent-WTI spread to widen to US$10–30 per barrel.

The recent widening of the Brent-WTI spread is also likely to reflect concerns about declining production volumes in the North Sea. More transparent information about oil reserves, daily production volumes and demand-driven factors could assist more efficient pricing in the oil market. Information about the demand for oil is often not known until well after the period for which it is reported. On the supply side, there is ongoing concern regarding the accuracy of various countries’ reported production volumes, while oil reserve estimates are subjective and depend on partial information and project feasibility. There have been steps towards greater transparency in the oil market; for example, the Joint Organisations Data Initiative (JODI) was established in 2001 to provide accurate and timely crude oil data on production, consumption, trade, refining and inventories. Nonetheless, there is still scope to increase country coverage and data quality

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Yemen’s multiple proxy wars a recipe for a famine

Crikey has a look at the famine in Yemen, exacerbated by high prices for diesel - Yemen’s multiple proxy wars a recipe for a famine.

For decades throughout the 20th century, the idea of famine had two dominant uses in the West.

The first was proof of the Christian ideal that “the poor you will always have with you”, thus re-affirming the eternal need for charity, and the limited usefulness of political struggle — the second was to reaffirm a vaguely or explicitly racialist and Malthusian notion that the dusky-skinned two thirds of the world really couldn’t manage themselves that well, and were doomed to over-breeding and starvation. Before the Second World War, China was the locus for this concern/panic — in various famines until the 1949 revolution, children would be exchanged between families to be eaten, or sold in the marketplace.

After the war, attention switched to India, and then in the 1970s and ’80s, to Ethiopia and the rest of Africa. The story was static, and endlessly repeated — skeletal children, milk powder, guilt, appeals, etc. The global extravaganza of Live Aid in 1985 was probably the acme of this well-meant but bone-headed view of starvation — appropriately enough celebrated by a song in which a phalanx of stars wondered if animist and Muslim peoples even knew it was Christmas time at all.

But by this time another view of famine was beginning to permeate the liberal West, with the 1981 publication of Amartya Sen’s Poverty and Famines, which deployed an array of theories to argue that famines almost always occurred in regions where there was plenty of food — and that even when there was a will to alleviate the famine, the absence of democratic and open political structures made such alleviation impossible.

Sen’s example was the Bengal Famine of 1943 — something that Commonwealth readers rarely hear of in tales of WW2, because 3 million Indians died due to the incompetence, indecision and outright racism of the British authorities. Sen’s argument made an impact where more radical left-wing accounts of the political nature of famine had been dismissed — but many were still unwilling to concede one of his core points, that one of the great barriers to alleviating famine was the market itself.

Sen’s argument has made it impossible for Western news to report famine in the way it once did, but it’s a close run thing. Fragments of reasons a region might suddenly descend into desperate starvation are aired, but there remains a basic inability to tell a connected story. The default position remains the Pieta, the starving child in arms.

Which brings us to the Yemen famine, which has suddenly hit the headlines, after bubbling in the background of the news for months. Ten million people — nearly half of the country’s population — are at risk of starvation, yet the food shortage is not affecting whole regions or areas equally. The burden is falling overwhelmingly on the poor, with people starving while nearby markets are full.

Though there’s been a persistent food shortage since the global food price rise in 2008 — and in fact food has always been short for the poor in the country — the situation has been made urgent by several coincident factors. A drought has persisted for more than three years, and is at its worst this summer, leading to a lack of work for millions of rural labourers. It’s also Ramadan, which, perversely, as a month of daylight fasting, raises food prices — since the fasting is followed by night-time feasting.

Added to these woes, Yemen is starving because it has become a site for multiple proxy wars — the Shia-based Sadah uprising from the north-west, a South Yemen uprising (based around the territory of the old Soviet-era Marxist state), and the Arab Spring general insurgency against the 30-plus-year reign of President Salleh, and last but not least a proxy war between al-Qaeda and US drone attacks.

The result is a country in which substantial networks not merely of trade, but also of inter-family support and charity have broken down, making the usual transfer between rich and poor all the more difficult, such as it occurs. To be fair, it has also been pointed out that the production of the intoxicant herb “khat” dominates agricultural production without providing any nourishment (though it also acts as an appetite suppressant), to the detriment of food production and household budgets.

But above all and beyond all this is the way in which Yemen is trapped in a global commodity system, with steadily rising prices for basic staple foods (of which Yemen imports 90%), and for diesel oil, which is used to pump water. At this point, with diesel oil unaffordable, many families are reliant on charity for a continued supply of water.

This crippling gap has led Oxfam to approach the problem in a simple way — they’re simply giving money to the poor, so that they can shop at market, and also acquire diesel. But the inevitable result of that will be a further bump in prices as the money swims into the system without expanded production, and the cycle begins again.

The Yemen famine then, is something we will begin to see more and more — a situation in which a poor and precarious country has its price signals swamped by global demand and remorselessly rising prices. With several decades of rising crop yields and low oil prices, now curtailed, it will be the nations who have not managed to get on the development ladder — or the poor parts of those who have — that will pay for the prosperity being enjoyed by a booming global urban and industrial class. In that case, the price signal becomes not a carrier of information, but a barrier to it, a la Sen — it tells us nothing about what is really required to be done, within any ethical system worthy of the name.

That story won’t be told in even the most searching reports on this famine, or the next, in the next place. We have come a long way from famine as an act of God, but we are not yet ready to recognise it as a product of global markets, or our role within it.

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Marginal Oil Production Cost Nearing $92 Per Barrel

Future Pundit points to a Bernstein Research paper describing the marginal cost of oil production - Marginal Oil Production Cost Nearing $92 Per Barrel.

Energy analysts at Bernstein say the marginal cost of oil production, already $92 per barrel, is nearing $100 per barrel.

The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

Their analysis does not include OPEC or former Soviet Union producers. But this does not matter. Since the former SU and OPEC aren't going to grow their production fast enough to meet rising world demand the marginal cost of the other producers will determine at what price rising demand and market price will meet.

This rapidly rising marginal cost of production is what Peak Oil looks like. Peak Oil is going to happen because marginal cost will go too high for the world economy to afford to pay what it takes to boost production. At that point oil production will start falling. I originally expected peak production to happen at a much higher price for oil. But the European debt crisis, the deceleration of Chinese economic growth, and the continued weak US economic recovery make me think peak global oil production will happen at a price not much higher than current oil prices.

The costs of tight shale oil is very high and high oil prices are needed to keep it flowing.

"The United States is producing an awful amount of oil from tight shale and tight sands reservoirs... If oil prices send a signal and drop below the $90-$80 level it is going to be uneconomic to drill those well. So drilling will stop immediately," said Michel Hulme, fund manager at Lombard Odier.

How high an oil price is needed to start world oil demand headed on a downward slope? Higher or lower than the current price range near $90-100?

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Has The World Reached Economic Peak Oil ?

The peak oil world seems to have (thankfully) mostly moved from viewing the defining aspect of the peak of oil production as a function of oil in the ground to being a function of the price it takes to produce new oil - David Strahan has a good example of this at his blog - HAS THE WORLD REACHED ECONOMIC PEAK OIL? .

Whisper it. Oil production in the US is increasing. The country where output peaked in 1970 and then shrank by 40 per cent over four decades, has turned some kind of corner. Between 2008 and 2010, production rebounded by 800,000 barrels per day to 7.5 million barrels per day, and analysts forecast more growth to come. Goldman Sachs predicts that by 2017 production in the US could reach almost 11 mb/d, just shy of its all-time high, restoring the country to its former glory as the world’s biggest producer. ...

Indeed, if the world is suddenly awash with oil, somebody forgot to tell the oil market. Oil remains stubbornly above $100 per barrel of Brent crude, the main international benchmark. Most analysts agree this is because supply is struggling to keep pace with demand, despite weakening western economies. But if all this extra oil is coming on-stream, how come?

Part of the reason is down to short-term unforeseen disruptions, such as the Deepwater Horizon disaster in theGulf of Mexico last year which delayed many drilling projects, and the Libyan revolution which cut global supply by almost 1.6 mb/d. The impact of these events should fade in time but there are clearly deeper forces at work. Producing oil is getting harder.

Not that it was ever easy. The amount of oil produced by existing fields is always in decline because as oil is extracted, pressure in the reservoir falls and the oil comes out more slowly. As a result, every year the industry must drill new wells capable of supplying around 3 mb/d – or 30 per cent of Saudi Arabia’s production – just to stand still. Satisfying the growth in global demand, at least when the economy is expanding, requires roughly another 1.5 mb/d annually.

Filling these holes gets more difficult as the “easy oil” gets scarcer. Companies are now exploring to the ends of the earth – from the Falklands to the Arctic– and are drilling reservoirs that are deeper, hotter and higher pressure than ever, all of which raise new engineering challenges. That has pushed costs up massively, with effects that have yet to be widely understood.

Offshore, companies are working at ever greater depths. During the 1980s and 1990s, for instance, Petrobras, Brazil’s state oil company, made most of its offshore discoveries beneath about 3 kilometres of sea and rock. In 2007, it found the Lula field, about 7 km down. Drilling Lula needed 4 km more specialist steel pipe at a time when steel prices were soaring because of higher energy costs.

Even onshore, costs are rising. Shale-oil fracking wells typically run horizontally and need four times as much steel as a vertical well. According to analysts at JPMorgan, such inflation is rampant throughout the industry. Exxon’s production investments, for instance, soared from $15 billion per quarter in the 1990s to more than $100 billion in the second quarter of 2008 – while the amount of oil and gas it produced scarcely changed.

Some of the most costly oil comes from the tar sands of Canada, with its vast open-cast mines and energy-intensive production processes. According to investment bank Barclays Capital, new projects here need to earn as much as $90 a barrel just to break even. Saudi Arabia, the only country with meaningful spare production capacity, could have produced oil more cheaply a few years ago, but not now. It has increased public spending following the Arab Spring, and now needs $95 per barrel to balance its budget. These pressures, says Paul Horsnell, director of commodities research at Barclays, mean that oil prices are unlikely to fall below these levels unless the economy collapses. He forecasts $137 per barrel in 2015, and $185 in 2020.

So if there is lots of oil down there but it is much more costly to produce, can we have as much as we want if we are prepared to pay for it? Well, that depends on what you judge to be enough and who you mean by “we”, says Steven Kopits, US managing director of energy consultants Douglas Westwood.

The trouble is, high oil prices don’t just encourage oil companies to innovate, they also damage national economies – although some countries are more resilient than others. A penetrating analysis by Kopits found that historically theUSgoes into recession whenever it spends more than about 4.5 per cent of its GDP on oil. Today, that would equate to $90 a barrel. That level also holds for others in the OECD club of wealthy nations, says Kopits. But the evidence suggests thatChinais willing to pay more; it only cuts back on oil purchases when they account for more than 6 per cent of its GDP, equivalent to about $110 per barrel.

The disparity, says Kopits, arises because Chinese society assigns more value to a barrel of oil. Gaining a barrel can transform the lives of Chinese people – allowing them to travel by car for the first time, for example. In the west, losing a barrel merely means trading in a gas-guzzler for a more fuel efficient model.

But oil is so useful that nobody cuts back voluntarily, meaning prices must rise to excruciating levels to force rich western consumers to economise. The first “peak oil recession” started in 2009, says Kopits. It took oil at $147 a barrel and the deepest recession since the 1930s to prise oil from the grip of consumers in OECD countries. Since early 2008, OECD oil consumption has fallen by 4 mb/d, while non-OECD consumption – mainly inChina– has gained 6 mb/d. Global oil production rose 2 mb/d during that period, so developing countries have consumed all the additional supply plus that given up by industrialised economies. “China is bidding away the OECD oil supply,” says Kopits, “and recessions are the mechanism by which that oil is being transferred from weaker economies to faster growing economies.”

With China embarking on rapid “motorisation” – car sales in China leapfrogged those in the US in 2010 – the outlook is for repeated oil price spikes and recessions. We appear now to be entering the second peak oil recession, says Kopits, and others will follow. For the time being this is a problem for the west, but prices could rise to levels that are unsupportable even for China. On this view, peak oil is as much an economic construct as a geological one.

Analysts at Deutsche Bank are more optimistic, and predict that a final oil price spike to $175 in 2015 will lead to rapid electrification of transport and relieve pressure on the oil supply. But Kopits is doubtful that we can escape so easily. “Buckle up,” he concludes, “we’re in for a bumpy ride.”

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Blodget: It's Time To Start Freaking Out About Oil Prices

The Business Insider has a column by Henry Blodget worrying about now perpetually high oil prices- It's Time To Start Freaking Out About Oil Prices.

There have been so many other temporary emergencies in the world over the past few years that it's easy to overlook a permanent one:

Oil prices.

Right now, much of the global economy is weak... and oil is still over $100 a barrel! A few years ago, when oil prices first hit this level, the news came as an absolute shock. And soon, when gas hit $4 a gallon, the entire national conversation changed.

(It didn't change so much internationally, because, thanks to gas taxes, other countries already charge way more than $4 a gallon for gas, so oil price moves don't have so huge and visible an impact on driving costs).

Specifically, $100+ oil caused many Americans to buy different cars and drive less. And it put a choke chain on the economy, throttling growth. And, shortly thereafter, the economy tanked. And then, of course, oil prices followed the economy down, allowing everyone to focus on other more pressing emergencies.

But then, with even a crappy economic recovery from the depths of the financial crisis, oil prices soared again. And now they're back to near-emergency levels, even with the global economy sputtering. ...

Yes, if the global economy goes back into recession, oil prices will drop again. But the drop will be temporary. And if the economy ever threatens to start growing at its full potential, meanwhile, oil prices will likely keep right on going up. Until they choke off growth again.

And so on.

It has gotten to the point, in fact, that oil prices may start to act as a natural Central Bank on the world economy--raising costs when the economy starts to heat up and cutting them when it cools. And that would be fine...if we could maintain reasonable oil prices when the economy was running at a healthy rate.

But the economy is not running at a healthy rate right now, at least not in Europe and the United States. And oil prices are already over $100 a barrel.

So we hate to think what will happen if and when we finally do see a vigorous economic recovery.

McKinsey Quarterly has a look at ways companies can prepare for an era of high oil prices - Another oil shock? (free subscription required to read the whole article).

It’s been a while since the world has been truly preoccupied with the threat of sustained high oil prices. The global economic recovery has been muted, and a double-dip recession remains possible.

But that dour prospect shouldn’t make executives sanguine about the risk of another oil shock. Emerging markets are still in the midst of a historic transition toward greater energy consumption. When global economic performance becomes more robust, oil demand is likely to grow faster than supply capacity can. As that happens, at some point before too long supply and demand could collide—gently or ferociously.

The case for the benign scenario rests on a steady evolution away from oil consumption in areas such as transportation, chemical production, power, and home heating. Moves by many major economies to impose tougher automotive fuel efficiency standards are a step in this direction.

However, fully achieving the needed transition will take more stringent regulation, such as the abolition of fuel subsidies in oil-producing countries, Asia, and elsewhere, as well as widespread consumer behavior changes. And historically, governments, companies, and consumers have been disinclined to tackle tough policy choices or make big changes until their backs are against the wall.

This inertia suggests another scenario—one that’s sufficiently plausible and underappreciated that we think it’s worth exploring: the prospect that within this decade, the world could experience a period of significant volatility, with oil prices leaping upward and oscillating between $125 and $175 a barrel (or higher) for some time. The resulting economic pain would be significant.

Economic modeling by our colleagues suggests that by 2020, global GDP would be about $1.5 trillion smaller than expected, if oil prices spiked and stayed high for several years.

But like any difficult transition, this one also would create major opportunities—for consumers of energy to differentiate their cost structures from competitors that aren’t prepared and for a host of energy innovators to create substitutes for oil and tap into new sources of supply.

Furthermore, if we endured a period of high and volatile prices that lasted for two or three years, by 2020 or so oil could face real competition from other energy sources.

The UK Daily Telegraph is quoting BP chief Bob Dudley talking about the risk high oil prices pose to economic recovery in the US - Bob Dudley says high oil prices threaten economic recovery
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Mr Dudley said that US consumers were on track to spend $200bn more on oil in 2011 than they had done last year, due to the higher crude prices. He said that US consumers would be the first to feel the effects of rising crude prices because fuel taxes in the country were so low, leaving only limited potential to lower prices at the pumps through tax cuts.

Oil prices were pushed up at the start of 2011 by instability resulting from the Arab Spring and have remained above $100 for most of this year.

Strong demand from Asian countries, which Mr Dudley said was "holding up", has helped to keep the prices high, despite the eurozone crisis threatening economic slowdown.

However, if oil prices did negatively affect the US economy, the impact would reverberate globally, he warned. "A downturn in the US affects goods and services from China, India and indeed this region [the Middle East], particularly if energy demand is affected."

Mr Dudley said that the energy industry needed to add the equivalent of one large oil producer like Saudi Arabia every five years if it were to offset the decline in output from existing fields.

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