Oil heads for $80 a barrel this autumn

Oil prices are a bit of a 'conundrum' to use Fed Chairman Alan Greenspan's description of flat yield curves in bond markets.

On the one hand, Opec officials maintain that the world is awash with oil supply, and indeed oil stocks are at their highest levels for several years. But there is a parallel shortage of refining capacity that can not be quickly addressed and a very real unease over the long-term supply side.

Currently the oil market has assimilated all these factors and come up with an oil price of almost $60 a barrel. This is a new record oil price in itself, and comes at a time of year when oil prices traditionally go down not up.

Indeed, if you look at the oil price chart the price trend is very clearly still on the way up. All you need to do to get $80 oil is to trace the line onwards. Traders can therefore be forgiven for trying to price in what appears inevitable.

The sight of gas imports arriving in the UK for the first time in 20 years is a reminder that this non-Opec producer is starting to run dry. Russia, the second largest oil exporter in the world, is also having trouble increasing supplies this year after several years of growth. It is a bit melodramatic to say that oil is running out, but there is less and less of it about.

Where are the new oil discoveries? Where is the new technology to extract more from old fields? And what of new technology to replace petrol in cars or oil in power stations?

None of the above is available. However, what has happened in the past, and will undoubtedly happen again, is that oil prices will pass a ceiling beyond what the consumer economies can handle.

Then recession will follow in short order. There is already a recession in Italy and Germany and Japan are pretty close to one; even the resilient UK seems to be in a retail recession. The Chinese economy is slowing, and only the debt-fuelled US economy continues to roll ahead.

Professional economists are much more pessimistic about the US economic outlook in private than they are in public. The $24 trillion debt that hangs over the US economy is surely not about to be wished away by gung-ho consumers prepared to borrow even more.

No, $80 a barrel will be a Day of Reckoning, and this autumn is probably going to be full of fireworks in capital markets as a consequence. In the meantime, consumer nations should enjoy their summer holidays in idle prosperity while they can.

In the GCC wiser leaders worry that today's oil price boom might turn into tomorrow's oil price bust, and that would not be good news for the producer nations either, although liquidity would still remain high for some time.