Sometimes bubbles are a good thing. Take the price of raw material: a crash in the market involving a fall in prices to the level they were at two years ago, for example, would have the world celebrating save those who work in the industries concerned.
The current boom in commodity pries is not new. The industries follow a predictable pattern. When the price is high, investment in extraction and mining jumps. This eventually leads to an increase in supply, which forces price down; as a result companies take the foot off the investment pedal; prices rise again and the cycle continues to rotate. The hope is that this is all we are seeing at the moment – a natural and ever repeating stage in the commodity cycle. But supposing this time it’s different. This time around, after all, high prices are not just caused by supply. Demand has a lot to do with it too.
In fact, if you take the oil industry, oil supply is at an all time high, but demand from China, and to a lesser extent India, is growing faster that they can raise output. And yet, the current impact of growth from China and India is nothing compared to what we are going to see, and therefore the danger is that demand is set to continue to outstrip supply and we are in for many, many years of high prices. it is fears relating to this shift are the true reason behind the recent market falls.
But Lord Browne, the chief executive of BP has sounded a note of optimism. The price of oil could fall from the current level of around $70 a barrel to $40 within five years. Beyond that, it could fall further still, he has claimed.
In an interview with the German magazine, Der Spiegel, published today he talked about new oil discoveries in the Caspian Sea, the potential residing within the oil sands of Canada, and the increasing ability to extract more from oil reserves. He said that in the past we could just get 20 to 30 percent from an oil field. This has risen to 40% and he expects it to rise further still to 50 or even 60 percent.
Lord Browne did say however, that he expected high prices for the next five years, so don’t expect an crash in the price of black gold.
© Investment & Business News 2013