Rising oil prices during a recession?

So somebody at the Telegraph has noticed that oil prices aren't doing what they should... Of course, back in 2008 it was all playing out as normal - prices reached a peak, most economies in the world went into recession, and the price plummeted back down again.

But look what's happened since 2002:

• 2002 - Jul 2006: run up from $20 to $76 
• Jan 2007: dropped to around $52 
• Jul 2008: up to $147 
• Dec 2008: drop to around $35 
• Apr 2010: up to $85 
• May 2010: drop to $65 
• Dec 2010: Brent and WTI start to diverge (around $85 at the time) 
• Apr 2011: Brent at $125, WTI at $110 
• Oct 2011: Brent at $105, WTI at $77 
• Feb 2012: Brent at $126, WTI at $108 

So right now many countries are back in recession, or close to it, but the price keeps heading upwards.  Also, from the UK point of view, note that $125 today is about £79.60, while $147 in July2008 was about £73.50 - so in £ sterling, the oil price is at a new high now.

Check out the average prices as well:

Year	WTI ($)	Brent ($)
2007 average	72.34	72.44
2008 average	99.67	96.94
2009 average	61.95	61.74
2010 average	79.48	79.61
2011 average	94.87	111.26
2012 average	101.09	114.82

So what the guy in the Telegraph has realised is:

The unpleasant fact we must all face is that the relentless supply crunch - call it `Peak Oil’ if you want, or `Plateau Oil’ - was briefly disguised during the Great Recession and is already back with a vengeance before the West has fully recovered.
...
So we have a remarkable situation. China alone will be adding 125m cars to its roads over the next five years, with auto production targets of 30m annually by 2016. India is spending $1 trillion on infrastructure projects over the next five years.
...
The West has the disquieting experience of watching crude soar even as we languish in stagnation. This never used to happen. If we faltered, energy costs would fall too, acting as a stabilizer. This harsh new reality is going to become uncomfortable when the emerging world enters a new cycle of growth, leaving us behind. Rising utility costs have already raised the numbers of UK households in poverty from a fifth to a quarter.

We should not be defeatist. Engineers and scientists are forever at work. A quantum-leap is possible in solar technology. The Chinese may crack cheap and safe nuclear power from thorium, abdicated by the British. But we should not be complacent either. Windmills anybody?

Read the full story here.

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New all-time high oil price in £/barrel - what it means for the UK

Back in early July 2008, oil prices were at $145/barrel, and with the sterling/dollar exchange rate at the time, this was equivalent to £73/barrel.

This morning, the price of Brent crude oil approached $120/barrel, while the West Texas Intermediate price (a US-focused price) was in the $100-105 range. There's lots of reasons for the difference between the price benchmarks, but the important thing is that WTI is only available in the USA, while Brent is named after production from the North Sea.

Add in the fact that the exchange rate is now $1.62 to the pound, while it was almost $2 to the pound in July 2008, and you now have an oil price this morning of about £74/barrel.

So, in the UK we're now at another all-time high oil price, so expect to see the price of petrol and diesel climbing over the coming days and weeks. Also, consider that the last price spike came at a time of affluence, and helped trigger the biggest recession in decades, while this spike comes while we're still barely out of that recession, and are about to face significant cuts in government spending.

Finally, the persistently high and climbing oil price makes nonsense of the Bank of England's view that the inflation pressure from oil is transient. Expect higher inflation, and interest rate rises to follow. Ultimately, the price of oil will only fall back when enough people decide they are too broke to buy it any more - and that's where we're headed anyway...

At least it's a sunny day.

Mike

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