Have energy prices peaked?

Tuesday May 6, 2008

Could oil mania be coming to an end? | Anatole Kaletsky - Times Online

Today, with oil reaching new highs, is probably not the best day to link the article from the U.K. Times Online. However, it is interesting and thought provoking so I will reprint a few exerpts and you can read the rest if interested.

Concerning a U.S. recession:

While the slowdown in Britain and Europe has only just started, the US economy now seems likely to avoid an outright recession as Washington’s huge tax cuts, interest rate reductions and bank and mortgage bailouts appear in the nick of time over the economic horizon,

What could prevent economic recovery:

there is now only one key uncertainty marring the signs of improvement: the huge increase in energy, food and other commodity prices since the start of this year. This now poses a far greater danger to the world economy and financial system than the correction in US and British housing markets and the related credit losses suffered by leading banks.

Three reasons commodity inflation is worse than housing deflation:

First, rising prices of food and energy hit poor people hardest and therefore provoke turmoil among groups that would otherwise be politically apathetic

Secondly, inflation is inherently harder for governments and central banks to deal with than deflation

Thirdly, the countries most exposed to the risks of commodity inflation - China, India and other large consumers of energy and food - are precisely the ones that the world economy now depends on for most of its growth.

However, the author puts forth the opinion that the commodity inflation is primarily panic and speculation driven and not by a supply and demand imbalance. He gives several arguments to back up his position and I will include one:

The Chinese and Indians are not eating any more rice today than they were three months ago. The doubling of rice prices cannot therefore be explained by a sudden shift in supply and demand. And the same is true of oil, since the global growth of oil output in the past two years has been substantially faster than the growth of consumption.

The article closes with this note:

This week Brian Marber, one of London’s most experienced technical analysts and one who has been consistently forecasting higher oil prices, told his clients that the trend was probably reversing. Let us hope he is right.

Read the article and see if you get the same take from it that I do. Four years ago we were in the middle of a housing price boom and look where we are today. The same four years ago gold was under $400 an ounce and oil was under $40. Is this another bubble that will burst in the near future?