Oil prices rising for all the wrong reasons

As most people have noticed, either at the pump or from the news, oil prices have again risen over $100 per barrel. As of this writing the benchmark Brent spot crude is trading at $116/bbl. Although oil prices have been creeping up for months as the global economy tries to recover, the latest bump is blamed on the unrest in Middle East, particularly Libya.

The last time oil spiked at $140/bbl, it quickly came down as the global economy went down the drain. And despite the reasons for the rise being real enough, the price has again rising for the wrong reasons.

So what is the “right reason” then? The problem with the explanations why oil price is going up now is that they assume that the [price/supply] disruption will be temporary. The situation is handled, in media and elsewhere, as something that can and will be resolved before long.

But it won’t. Because supply is inherently limited due to Peak Oil, prices will in the long (or even medium) term come down only when there is demand destruction. And, as the world is currently structured and due to oil consumption patterns, demand destruction will happen only when the economies contract. And, thanks to the importance of oil in the way the world is structured, high oil prices are well placed to set off such contraction, creating a vicious circle and highly volatile prices.

The oil price spikes of 2008 and now in 2011 could, and should, be thought of as warning signs of things to come, rather than a fleeting supply phenomenon that just needs to be somehow fixed. The supply issues run much deeper and are much more fundamental than the general media is leading us to believe. The world must learn to reduce demand in a way that does not bring about chaos, economic or otherwise.

That, however, is a tall order. Especially when the true reasons and the inevitability of very high oil prices in the medium/long term are ignored.

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