Runaway Oil Prices: Will History Repeat?

Crude oil prices rose about 30% in 2010 to levels not seen since the early 1980s. Given that, do rising oil prices predict another economic recession?

World oil prices are now hovering around the $90-per-barrel mark after having risen steadily in recent weeks amid debate over whether or not OPEC should increase oil supplies. In fact, oil prices have already entered into a risk zone and frightening the still delicate global economic recovery. In the BP Energy Outlook 2030, British Petroleum predicted the oil producers’ cartel, OPEC,  would see its share rise to 46% during the coming two decades – "a position not seen since 1977", just years after an OPEC embargo triggered the oil crisis in 1973.

In January 2011, the International Energy Agency (IEA) raised its oil-demand growth forecast for the year to 1.41 million barrels per day, lower than last year's jump in consumption, but higher than OPEC's growth estimate of 1.23 million barrels per day. Amidst supply-demand mismatch, rising oil prices are causing worries in importing countries about the economic cost of higher energy prices. In developed countries like the US, every single aspect of business and life requires some or the other form of oil.

There are some forecasts that prices will go to $100 a barrel soon. On the other hand, some experts though say this price is nowhere as high as that caused the Great Recession of mid 2008, as the US economy is still recuperating from the recession. But at this juncture, even a comparatively lower oil price at $85-90 per barrel adds to the heavy burden being stuffed for the consumers across the oil importing nations.

Oil’s Vicious Circle

Rising oil prices also add to the woes of the financial markets. Analysts say that the world economy is caught in a vicious circle as far as market crashes and high oil prices are concerned with both of them aiding and abetting each other. Higher oil price increases the trade deficit of the US. The increase in export bill leads to a weaker state of the dollar currency. A weak dollar in turn pulls up the international prices of dollar-denominated commodities. This allows the oil prices to increase further leading to exorbitantly higher oil prices. A market crash for the US then becomes inevitable.

Impending Oil Crisis

Amidst falling oil reserves in most oil exploring countries and lack of new significant oil discoveries at the same time is a pointer that an impending oil crisis may hit the global economy soon. Thus the impending oil crisis would further drive up already accelerating oil prices, making it all the more difficult for the economies like the US to keep the stock market from crashing without preamble. It looks like the world economy is heading again for another peak oil cycle which is set to cause the largest tumble down in the history of the economy. Let us hope history will not repeat!