This oil price rise will drive inflation upwards

Oil prices are on the up. Since early June, Brent crude has surged from just over $100 to reach $108.7 per barrel last week – a three-month high. West Texas Intermediate, the US oil benchmark, meanwhile hit $107, a level not seen since March 2012.

Rising energy costs hit consumers and firms, hinder growth and stoke up inflation, especially in an oil-importing country such as Britain. It’s particularly concerning that crude is rising despite growing evidence that the global economy is once again starting to slow.

lastfreeman: This is why there should be a small rise in BoE base rate from 0.5% to 1% or 1.25%. It would stop Sterling falling & provide stability for vital energy imports . A base rate of 1.25% is still very low by historical standards. At the other end, we should have a modern usury law banning interest rates of more than 36% above base rate.

inhope: I have been reading about the governments Help to Buy scheme with great interest.  This scheme is without doubt a double edged sword.   In summary it is a 5 year interest free loan of up to 20% of the value of a new build property.   The UK is suffering a housing crisis caused by limited supply and uncontrolled immigration. If the government does not implement policies to boast supply we are going to suffer another bout of property price inflation followed by a massive property price bubble.  Of course every bubble bursts at some point, if this scheme booms up prices the bust is going to be very, very painful.   Does anyone know if the government has put in place any measures to boost home building or has the government decided to totally destroy us by wiping out our economy and importing millions and millions of immigrants?

ryck: "…measures to boost home building…" This can be a disaster. The US passed the CRA: I maintain that the Depression of 2006, still hanging on inthe US and EU, was triggered off by the CRA [Community Reinvestment Act], an act that offered millions of mortgages to people with little or zero credit. Many mortgage papers were shuffled off to Fannie Mae and Freddie her imbecilic brother so that fresh monies would be used to make more such loans. Many mortgages were bundled and sold in piles. People with no credit and illegal aliens rushed to the fray. They could get a mortgage with zero down and didn't have to make payments at all and it worked out very well [politically] in California where newly-bought homes became hotels for illegal workers. We cannot exist on such a credit mechanism.

EVHappy: Tell readers to check out the charts. Not only has this price not been reached since around march of 2012, it is the second highest price reached since the crash of 2008! Remember that the real cause of the crash of 2008 was when oil prices reached $147 / barrel and people could not afford to pay the bills. The mortgage crisis was just one of the symptoms, not the base cause.  It will always be about the resources, not the funky financial magic surrounding things. That is just vapor and wrapping. 

moraymint: Good article, Liam, the essence of which is to point out that we're now bumbling along the peak oil plateau (wash my mouth out with soap and water). The wider implications of your report above will be, as usual, either misunderstood, ignored or ridiculed (or all three) by the majority of your orthodox economist peer group who appear to adopt one or more of the following views: > Peak oil is a 'theory' only. > Peak oil, if it exists at all, is not and will not be a problem for mankind. > Any notion that the economy is, at heart, an energy construct is so much boll**ks. The economics' pseudo-law of infinite substitutability will prevail. Oil, for example, will be substituted any day now by some cost-effective techno-wizardry demanded by the market; the pricing mechanism will see to that. > "Infinite growth on a finite planet? Easy peasy!" according to Tim Worstall of The Adam Smith Institute:… you'll see my reply to Mr Worstall's views in the comments section below his epistle. For as long as views like your own, Liam, remain out in the cold, so to speak, our political class will continue to plan our economy on the assumption that we'll all be back to industrial age rates of economic growth any day now (fingers crossed, touch wood, God willing etc etc, because those same politicians haven't the faintest idea how industrial age rates of economic growth will in reality be re-established). Hell, even the mighty Jim O'Neill told us only last Friday that "it appears the UK could really be turning a corner":… So, that's alright then. Consequently, for as long as revered economists like Jim O'Neill keep pointing to bright, sunlit uplands, politicians can/will keep spending, keep borrowing, keep printing money and everything will be alright on the night. It's called a slow-motion train crash. Unless and until our politicians embrace the concept that we've reached the end of industrial age rates of economic growth, then we'll continue to stoke up enormous, unprecedented socio-economic pressures. The real story behind your article, Liam, is truly alarming. This isn't an issue about a wee potential problem with inflation down the line, is it? I'll bet you know the answer to that. 'Energy - Reality Intrudes': 'The End of Growth':

Jason Aris: Now that the BBC is running a series trying to discredit peak oil as being yet another 'conspiracy theory' and spouting facts like the US will match Saudi Arabian output in the next few years (with no reference to the EROEI in getting the stuff out of the ground) just makes me all the more certain it is true and we are heading for disaster in the next few years.

Will Happen:  "Any notion that the economy is, at heart, an energy construct is so much boll**ks."  Does any serious person really think that the economy is NOT dependent upon (cheap) energy?  I find it hard to believe that a decision-maker could be that ignorant. Agree with you that the economy and the oil supply are locked in a dance of death.  Have to disagree with you about the politicians though.  What can they do?  Carter warned about the future in the 1970s and was trashed.  What politician would go to the polls with "we're doomed unless you drastically reduce your standard of living" when votes can be so easily obtained with "normal economic growth will resume shortly and you'll all be wealthier than before"?

moraymint: Will Happen After almost 10 years of following in some detail the phenomenon of peak oil, like you I've concluded that the political class cannot and will not acknowledge 'peak oil' per se. As you point out, there are no votes in declaring to an electorate that the next generation will be about governing a society going through the motions of economic contraction.  No politician will tout this. No citizen would vote for it. This is going to sound patronising, but I believe that most citizens cannot and probably never will get their heads around the idea that the economy is indeed an energy construct and that we've reached the end of the industrial/oil age; we've entered 'the long descent' (or 'the long emergency' according to James Kunstler). If you want to read truly prescient analyses of how complex societies like ours are likely to evolve over the coming decades then may I recommend two 'unputdownable' books: 'The Long Descent':  'The Ecotechnic Future': I decided years ago that the only way to prepare for what lies ahead is to adopt a DIY approach, focusing on what needs to be done at the levels of the individual, the family and the local community… all without any reference whatsoever to the political class - who are and will remain part of the peak oil predicament. ------ 'The Long Emergency':

GeorgyPorgy: In terms of analysis you are spot on. But of course none of this will change anything. There are too many vested interests - the oil industry for one - which effectively block any challenge to the suicidal agenda. The powers-that-be cannot or will not face up to the fact that the old system based upon cheap oil is now defunct. And they employ a legion of assorted apologists to give some flimsy credence to the notion that there is basically nothing wrong with the present dispensation and we can go on merrily forever in the same way as we always have done. It is frankly criminal, but there you are. This is a classic case of social, economic and political disintegration.

inhope: Yes. Printing money (QE) will spark inflation. Yes . Ultra low interest rates will be followed by high interest rates. Yes. Too many companies and households are being bailed-out by temporary emergency measures. Yes. I am off to visit my local new car dealer who is selling very expensive cars on cheap credit deals and I can afford  it because my mortgage payments are cheap. Yes. In the near future I am going to hand back the key of my house to the bank and make a run for it in my recently purchased car. Yes. Inflationary pressures are building up Liam, how long did it take to work all this out? 

keithfromashford: Don't mention peak oil. From the peak, production just falls, gradually at first and then faster and faster. The Hubbert Curve, is a bell shaped curve, that we are right at the top of. 

ryck: I don't think we are at peak. Peak can only occur when %50 of the wells, or more, stop producing at their current levels. China is drilling in the South China Seas and we do now know how much oil is down there.  Political wishes are frequently not related to facts. 

keithfromashford: Hubbert predicted in 1956 that US oil production would peak around 1970, which it did. His curve is a bell shape, look at a graph of oil production and you will see it rose rapidly, started to taper off and has now plateaued. It's down hill from here on in as far as oil productions goes. There will still be more finds, but each is tending to be smaller and more expensive to extract than the last. Ghwar is the largest oil field in the world and was discovered in 1948, there has been nothing like it since.

ryck: Keith See my post and ref above. 

crashgordon: ryck At its peak Saudi crude returned $30 for every $1 invested.Tar sands the equation is more like $3. We are scraping the bottom of the barrel.  The easy stuff is gone. Even the Saudis are pumping their wells full of water to maintain pressure meaning the down side of the bell curve could be steeper. Add to the mix an extra 2 billion on planet earth by 2050 and the rapid growth of China and India and the supply and demand equation becomes untenable. We can't increase production beyond its current peak of around 90mb/d.

ryck: "The easy stuff is gone." What about the South China Sea and Mexico? What is China getting out of their new wells. "EIA estimates the South China Sea contains approximately 11 billion barrels of oil and 190 trillion cubic feet of natural gas in proved and probable reserves. Conventional hydrocarbons mostly reside in undisputed territory." We don't have a clue how much oil is below the surface. Looking at old wells is not instructive. 

William Davison: Mexico peaked in 2004 "EIA estimates the South China Sea contains approximately 11 billion barrels of oil"  Thats only just over 4 months world supply, we consume 30 billion a year.

moraymint: ryck With respect, you're being Panglossian. When I read comments like yours - and there are plenty of them around and about the place - the thing that always comes to my mind is precisely that which the orthodox economists tell me to consider: the wondrous effects of the pricing mechanism. If there was a ready substitute for crude oil offering all of the facsimile benefits of oil at its 150-year trend price (inflation-adjusted) of around $25 per barrel then (a) the substitute would be with us here and now, and (b) the price of crude oil would be plummeting as demand for it collapsed and customers switched to the crude oil substitute. When I see advanced and emerging economies flourishing, the price of oil falling (or at least stabilising) and the new, miracle substitute for oil flooding the planet with its benefits then I'll conclude that mankind is not in fact being enveloped by an energy crisis; specifically a looming crisis of the end of cheap oil. By "cheap oil" I mean "infinite" supplies of oil at a price that allows us to sustain our debt-ridden, state-heavy, unproductive complex societies indefinitely (which is the major assumption of neo-classical economists who argue that, by and large, there's little/no reason why the next 250 years shouldn't be much like the last 250 years). Meantime, I'll run with the hard, in-your-face evidence for the predicament presented by 'peak oil' and the consequences that are already flowing from it. Finally, on your specific point implying that there is much oil still to be had, there are indeed probably trillions of barrels of oil in the earth. However, since the economics are now tending towards us having to expend a barrel of oil to consume a barrel of oil then those trillions of barrels of the stuff are going to remain precisely where they are. The bottom line here is that if the Energy Return on Energy Invested (ERoEI) doesn't stack up (and increasingly it isn't stacking up) then, as a famous astronaut once said, "We have a problem." I'm happy to stand corrected, but for now all the evidence suggests we have a problem; a very serious problem.

devondickie: Good piece. The fundamental issue is this. With falling real incomes, the economy is not going to grow - and if we suffer the double whammy of rising oil & gas prices with a falling currency, this magnifies the effect of the international pressure on energy prices, so driving up UK inflation even higher. We are already floating on a sea of QE money created out of thin air, which is being used to effectively monetise our debt via BoE purchases of gilts, with the Treasury paying the interest on them - 50% of our debt that is - then the Chancellor goes round to the BoE back door and demands the money back, because HMG owns the BoE - £38 Bn this year alone - add in the other dodgy accounting sums like swallowing the £28 Bn of PO pension funds, and in reality there's a £100 Bn hole in the accounts this year, which means the deficit is actually accelerating, not declining at all. By rigging our debt market and making the BoE the Buyer of Last Resort for Gilts, all the market pressure which would be realised through Gilt interest rates is now loaded on to Sterling, which must bear the brunt of market sentiment on the UK and its debt. The chances of a vicious feedback-driven downward spiral for the UK economy are now plain - energy prices rise, Sterling continues to fall, so inflation rises sharply, but incomes do not so people cut back on their spending, whilst the government has said it will take another £110 Bn out of the economy in spending reductions , which is equivalent to £1.1 Tn of aggregate demand lost. (i.e. @ a 10 time multiplier - so every £1 changes hands 10 times per year - or not - after HMG takesit out of the economy.) The stagnant economy now goes hard into reverse, and the million new jobs rapidly evaporate, beig overwhelmingly part time, temporary and insecure, so putting huge strain on the government's finances as tax receipts fall sharply and unemployment rises rapidly. The market now takes one look at the UK, and concludes the only way is down - so sentiment shifts sharply against Sterling, which stokes yet more inflation, which cuts living standards yet further, which deepens the deficit, which prompts yet another round of spending cuts, which… You get the picture. And the underlying picture is even worse - a million more jobs, but not another bean being produced - so productivity has plummeted and with it our competitiveness. With an in/out referendum on EU membership already raising red lights on their dashboards,  multinationals will brake hard on investment in the UK - so aggravating the recession. I'd give it 6-9 months to a full blown Sterling crisis.

moraymint: In a word: hyperstagflation.

stephenmarchant: Many of us fail to see any true market forces at present. With the indebted West printing trillions of IOUs the oil price can keep rising in nominal terms. If you are a banker or speculator in finance you may well be operating in a parallel universe where the funny money maintains inflation proof earnings. For the majority in the real economy who produce real goods and services there is the chill wind of stagflation. These same people are being suckered into taking on more debt with 'help to buy' and other incentives to maintain house price inflation. There is no painless exit or tapering from QE and therefore we either see stagflation turn to hyperstagflation or higher interest rates deepenning the depression. Whatever path our politicos and Central Bankers take, Malthusian economics of 3billion BRICs competing with 1 billion in the largely indebted West will drain per capita wealth from us in the long term as we pay more for food and energy.

ryck: I agree here with your comments and caveats. My post was based on a singular point function on some unknown curve where the metrics for good performance by corporations seems to justify the current equity prices and earnings. The numbers, however phony, work well for the present. That might change.  Whether the market forces are 'true' or not they are influencing buying and selling of equities and people buy on earnings increases and good reports. That may be phony, but such are realistic for the market moment. The curve may change soon and show that the equities are close to worthless. That is a different matter and unknown now.  I agree that QE is like crack and that the smoker cannot simply put down the pipe without withdrawal symptoms. But, QE has the singular attribute of extending the time when the debts will crush several economies in the US, UK an EU. During that interval, I recommend that tangible assets be purchased and many corporations are such assets and many did well during the Great Depression. Depressions and such do not erase all assets or deposits. The core necessities remain and those businesses who can supply energy, food, medicants and such will be successful in some measure. 

adamc18: After all of the drivel elsewhere about fraccing allowing 'energy independence', congratulations Liam for writing an honest, carefully researched and intelligent article.  One fact rarely mentioned in the mainstream media is the decline rates of oilfields.  Its proponents talk as though shale oil production can simply be added to constant production from conventional oilfields.  In reality the latter are declining, on average, at around 6% per year; a bit of hard-won, expensive shale oil is never going to compensate for such declines in the world's massive oil regions.  Peak conventional oil was in 2006 and biofuels, fracced oil or bitumen from Alberta are simply not going to be able to compensate. So, expect inflation, especially  in energy and food and deflation in wages.

Plantersnuts: Fraccing is being used to convince the masses that there is a brighter future. No different to the lies told by the communists.

Caledonian_Comment: "… worries that debt service costs will rise… " They already have - try getting a mortgage, overdraft or business loan at anything like base rate and see how far you get. Banks are ripping off savers AND borrowers. -