The sight of the oil price breaching the $55-a-barrel level is seriously disturbing. Economists believe that every jump of $10 a barrel takes about 0.5% off annual global growth for several years, along with accompanying downward pressure on the dollar. And although oil producers are not complaining in the short term, stability in the longer term is more important, and key producers such as Saudi Arabia want to see prices lower and have agreed to produce more.
Fundamentals ignored
The current oil market, however, seems to ignore some basic economic fundamentals that have serious long-term implications.
If the economies of China and India continue to grow – as they look certain to do – their energy needs will grow sharply as well. The current excess of demand over supply is not a passing phase, it is a structural shift.
Pressure continues
Unless the developed world decides to consume less (and drive cars less for example), the upward pressure on oil prices will continue and no amount of currency changes will alter this direction.
There are no easy solutions here but acknowledgement that a serious structural problem exists and that China and India are not going to disappear would be a good start.
