Thta’s the question lots of market analysts are starting to ask, according to Sarah O’Connor:
French fishermen and British lorry drivers set up blockades in protest at fuel costs, American Airlines grounded scores of older aircraft, and – most significantly – countries across south-east Asia said they would cut their fuel subsidies because they couldn’t afford to keep them.
Francisco Blanch at Merrill Lynch says these are signs that a “demand destruction point” is looming – where oil becomes so expensive that demand for it falls away. The market has already hit that point in Europe and the United States, but demand is still growing in emerging market economies where subsidies insulate consumers from the pain of high prices.
Nauman Barakat at Macquarie agrees with Mr Blanch that things might be changing. “The word on everyone’s lips is demand destruction which is very apparent in the US and may become a feature in the red-hot economies of Asia as those countries reduce fuel subsidies,” he says.
Daniel Yergin – head of CERA and author of The Prize, the best history of the oil industry that there is – was arguing something similar a couple of days ago:
The break point is already here. Oil is in the process of losing its almost total domination in ground transport. It is not going to fade away soon – such is the scale of its use and convenience, it will retain a dominant position for many years. But it will share the transport market with other sources as never before, reinforced by a new drive for fuel efficiency.
So now there are two schools of thought in the market: one that reckons prices are about to peak, and another that thinks that actually the peak will be in production – as we saw in the FT last week:
Veteran traders said they had never seen such a jump [in the price of forward contracts for oil – long term futures contracts have risen 60 per cent since January] and said investors were increasingly betting on the idea that production would soonpeak because of geopolitical and geological constraints. Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.”
But actually, just as in the case of food, a short term fall in prices isn’t irreconcilable with an outlook that tends towards a long term increase. Greater volatility – including short term price bubbles, just like the one we’ve been seeing on food – may just be part and parcel of the deal from now on.
After all, higher prices in the short term will indeed tend to ease demand – and also to encourage investment in new production, both of which will reduce pressure on prices. But if the long term geological fundamentals are downwards, then scarcity will tend to yank prices right back up again. The feedback loops between these four factors – geology, price, demand and investment – may make for a rollercoaster ride over the next few years…
