Oil at $500 a barrel - not a flight of fancy

The maverick economist Willem Buiter argues that $500 for a barrel of oil is not out of the realms of possibility.

“Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets.”

Such price spikes necessarily bring about huge shifts in the balance of economic power at least in the short term towards energy producing countries and would entail most (but not all) of the rich developed world adjusting to a sharp fall in real income. But by the time prices reach such levels, the incentives for conservation and investment in energy efficiency will have become over-powering.

The fact that we are at least considering prices for oil of almost unbelievable heights is indicative of how the world is changing before our eyes.

The rest of his article is here

In Business Week, Steve Levine questions whether the Saudi’s have the capacity to boost their sustainable supply to anything close to 12.5 million barrels a day