The price of crude oil has once again come into sharp focus triggered by the current turmoil in the Middle East. Economists and financial market participants are becoming increasingly nervous about the deleterious effects of high oil prices on the recovering economy.
Of course, geopolitical stress is not something new and oil prices have spiked many times in the past when tensions have flared in oil producing regions. However, this time oil prices were already on the rise well before the current outbreak of unrest. Furthermore, this price inflation has been occurring amidst very weak demand growth across the developed world.
While there will always be large swings in the price of oil based on economic cycles and geopolitical events there are two underlying secular trends that are likely to keep prices elevated long into the future.
One is the new demand created by the accelerating industrialization of the developing world and the concomitant rise of a vast new middle class. The other is the fact that oil producers are struggling to maintain and grow supply in the face of increasing depletion rates of older fields and smaller new discoveries with higher extraction costs.
Next week we will discuss a long-term approach to capitalizing on this trend.