May 01, 2006

We need to stop oil price vendettas

Sir, in your And the oil price keeps on rising, May 1, you correctly identify “a reason the supply response has been muted is that oil producers feared a glut of oil and a price collapse” but then you incorrectly characterize these concerns as exaggerated, and in that lies exactly the origin of all our oil problems. In a commodity with such an extremely low short term price elasticity as oil, anyone on top, whether it is the consumers demanding one barrel less than what is produced, or the producers producing just one barrel less than what is demanded, can exercise so much power that falling into a price vendetta is unavoidable. Today’s 70 dollars per barrel are 100% correlated with the below ten dollar price of early 1999 and predicted at that time, among others by the Economist, to head towards five dollars. If the world really wants to get out of this rollercoaster of prices, that benefits no one, the only alternative is to enter into long long-term supply and purchases agreements between consumers and producers, based on reasonable average boom and bust prices of oil. Anything else is just courting the next disaster for someone.

Sent to FT, May 1, 2006