The business cycle, the global financial crisis and the future of oil markets are currently the three most popular topics of discussion. Since the start of the recession, the international media has been quick to bring many new theories and revelations, brilliant in their simplicity, to light. Hope is the mother of invention, and amidst the crisis they cannot be disproved. However, in two or three years time 99% of this verbal chaff will have been blown away and only serious analytical work will remain.

Given the immensity of the topic, several key points should be highlighted. First, the global economic boom of 2003‐2008 overstressed energy markets, especially given the insufficient levels of investment during the preceding two decades. Second, supply and demand are still the main dynamics of markets. The effect of financial speculation was important in the particular conditions developed between August 2007 and August 2008, but it did not overturn the laws of the market. Third, during the peak of the crisis in the fall of 2008, the drop in oil demand was much steeper than the natural market processes of supply reduction. However, the Organization of Petroleum Exporting Countries (OPEC), a cartel which has repeatedly been pronounced dead, managed to stabilize prices on the oil market. At this stage of the recession, a price increase from $40 to $60 per barrel could be considered a success. Finally, the long‐term oil price must allow for production and investments (in particular) to recover at levels necessary to stabilize markets and prevent wild fluctuations. This price appears to be $70‐$90 per barrel – rather high considering the difficult economic environment predicted for 2010.

(...)

download full text

The article was authored by Leonid Grigoriev and published as CASE Network E-Brief No. 01/2010 .