Still struggling to wrap your head around the idea of $140 oil? Well, there’s worse to come, says LSE Economics professor Willem Buiter.
Buiter argues that while slowing growth in emerging markets may provide temporary relief, the fundamentals all point to one thing, and that’s an inexeroable march upwards. Emerging economies will continue to grow, and growth in these markets is “biased” toward energy-intensive industries, so commodity prices have nowhere to go but up:
Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets.
Even if common sense breaks out in India, China (perhaps even in the Middle East and other oil and gas producers) and domestic oil and energy use is priced at its global opportunity cost, the energy-intensity of global production and demand will be rising for quite a while.
So how high will prices rise? Buiter is sensible enough not to offer a specific number, but recapping a number of predictions, he suggests that even the most nightmarish scenario is plausible:
Arjun N Murti, a Goldman Sachs expert, believes we will soon hit $200 a barrel (up from the current $146 level). The CEO of Gazprom has predicted a $250 barrel of oil before long. Dr. Robert Hirsch, a Senior Energy Advisor at MISI and a consultant in energy, technology, and managemen, says that oil will peak at $500 within the next 3 to 5 years. While your guess is as good as mine (likely better), none of these figures seem outlandish.