Raise the Hammer
Those radical flat-earthers at Goldman-Sachs Global Investment Research have just released a report predicting that the oil market is entering a "super spike" period of price instability that could see oil top $100 a barrel.
G-S defines the "super spike" period as "a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return."
This, of course, dovetails almost exactly with the prediction of a modified Hubbert's Peak, in which price spikes caused by peak production drive demand down below output. The price then falls, spurring demand growth and another 'bang' off the peak before the long, volatile descent down the other side.
The culprit, according to the report, is a collision between global demand growth, driven by the United States and China, and the absence of spare production capacity. The report concludes:
Perhaps the ultimate answer to how high oil prices need to go before demand destruction occurs is derived from knowing when American consumers will stop buying gas guzzling sport/utility vehicles and instead seek fuel efficient alternatives.
The price of oil surged to a record $57 per barrel on Friday and started just under $58 per barrel this morning, fueled partly by concerns over the Goldman-Sachs report. OPEC has pledged to increase oil output by another 500,000 barrels of oil per day if prices continue to climb, but it's not entirely clear the oil producing countries can even meet this commitment.
Comparing the market environment to the turbulent 1970s, when sustained high energy costs finally forced a global recession and a reduction in demand for oil, the report predicts "gasoline spending in the United States that reaches 3.6 percent of forecasted GDP, 5.3 percent of consumer expenditures, and 5.0 percent of personal disposable income" if oil hits $105 per barrel.
The big difference between the 1970s and today is that the former oil crisis was political, created by a decision among oil producing countries to limit production and drive up the price of oil. Today, those same countries are running full-bore and can barely keep up with demand.
When the next crisis hits, it will be geological, not political.
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