Oil prices on the climb

Economists are wondering if the oil price has peaked or if we are witnessing the beginning of a climb that will take the price per barrel over 80 dollars. Crude oil prices hit new heights last week as geopolitical uncertainties, primarily centred on Nigeria and Iran, were exacerbated by a gloomy report from the International Energy Agency. The OECD's energy watchdog warned that global oil demand over the next five years will outstrip supply leading to tight conditions in energy markets. Its concerns centred on the supply-side, particularly on weakness of non-OPEC output.  But the prediction that demand will continue to grow despite high oil prices is potentially more worrying. 

A surge in crude prices over the last few years has been accompanied by calls for fuel preservation and above all, a switch towards alternative energy sources such as biofuel.  But to make biofuel, you need to tap into agricultural feedstock such as corn and sugar.  Increased demand has already begun putting pressure on prices, making both food and ethanol more expensive.  And although demand for oil has proven not particularly sensitive to higher prices, the production of biofuel is.  The positive outlook for biofuel has been based on a scenario where crude oil prices are high – it must be, otherwise most biofuel operations become uneconomic.  So far that scenario appears to hold. Yet, biofuel will become just as uneconomic if agricultural prices continue to rise.