The Effects of $80 Oil

The Bear's Lair: The effects of $80 oil
By Martin Hutchinson

-- With oil prices touching $42 a barrel on the New York Mercantile Exchange, many economic commentators have gone into denial, pointing out the many reasons why prices can be expected to relapse again to the $30-35 range. Yet there is an alternative scenario, in which supply disruption causes oil prices to rise much further, and it's worth looking at how such an event would play out.

Marginally the most probable scenario is still that oil prices will gradually subside, returning the oil sector of the economy to approximately its state over the last few years, with prices significantly higher than in the 1990s, but still well below the peaks reached in 1980-81. However a number of factors in the last few years have made oil market disruptions more likely. The spare capacity in world oil production, around 8 percent at the time of the first Gulf war in 1991, is now down to around 3 percent, since only Saudi Arabia has sufficient revenues and is sufficiently non-market oriented to maintain substantial spare production capacity. ...Link