Thursday, May 22, 2008

Oil Above $135 a barrel and Heathrow Expansion On-Hold.

The price of crude oil has reached a new record at $135.08 a barrel. It is amazing to think it was near $20 five or six years ago. The blame for this latest increase is placed on an unexpected drawdown in oil inventories coupled with a weaker dollar. US crude has increased in price by 20% since the beginning of the month with supply concerns making traders cautious about selling oil. Sam Bodman, the US Energy Secretary commented that these hitherto unknown oil prices are a fair reflection of tight supplies and strong demand for oil globally, rather than the cost being artificially elevated by investors.

I don't see the situation getting any easier either in terms of supply or demand, and the $150 barrel by the end of 2008 that I reckoned both recently and a couple of years ago seems very likely. Goldman Sachs have said that oil will top $200 a barrel by the end of 2010, but my own feeling it it will get there by the end of 2009.

Meanwhile, advisers to the UK government have recommended that the expansion of Heathrow and Stansted Airports should be put on hold for years, such is the controversy attending such actions. There are plans to build a third runway at Heathrow and potentially a sixth terminal, which has alarmed environmentalists. It is thought that there may not be a firm decision made until 2011.

Now this is an interesting coincidence, namely that some analysts estimate the arrival of peak oil by exactly then. I have said so before, but I simply don't understand why in the face of an alleged determination to cut CO2 emissions there is even the glimmer of an idea that the number of flights should be tripled by 2030. What will anyone put into the planes by way of fuel by then, anyway?

More likely there will be the economic brake of rising fuel costs and airport taxes which will act to constrain air-travel, the budget carriers will go out of business and there will be a huge downturn on tourism. This will be especially tough on countries e.g. the Czech Republic whose economy has grown well on cheap tourism. I read the other day that Prague is now the sex-tourism capital of Europe, having taken-over from Amsterdam.

I also noted a news-item this morning that the price of food is expected to increase at twice the rate of inflation year on year for the next ten years, but who knows really? It does seem clear that prices in general even of basic items like food and fuel are going to rise remorselessly and people will begun to hang onto their cash. The upshot of that will be a knock-on effect to the service sector, with people being laid-off there, less circulating money and taxes available and a downward economic spiral.

The Governor of the Bank of England commented last week that "The nice decade was over", and I'm sure he is right.

Related Reading.
[1] "Delay Heathrow airport expansion, say government advisers." By Andy Bloxham.,-say-Government-advisers.html
[2] "Oil hits record to surpass $135 a barrel. Reuters.
[3] Mervyn King: Bank of England has no room to maneuver."

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