A Thirst to Quench, at a Good Price

Global oil prices are staggeringly high, but poised to decline in the future. For a global economy that remains heavily dependent on oil, this is good news.

Oil prices are poised to decline. This is no black magic, but the result of geopolitical and industrial facts. The WTI blend of crude oil (the main American blend) has now reached 105 US dollars per barrel while the European Brent blend has topped at 125. The turmoil in the Middle East has left its mark on oil prices for the past few years – after all, one third of the world’s crude oil is produced in a conflict area. The costs of the current Iranian tensions are written directly into the numbers: The difference between spot prices for the WTI blend (what you pay for a barrel now) and “future” prices in five years (what you pay now for a barrel you will receive in 2018) is at a staggering 30 US dollars. The longer you are willing to wait, the cheaper your oil will be. As a rule of thumb (if we neglect the impact of inflation and financial turmoil), 30 US dollars per barrel would then constitute the “cost of the crisis.” We may also term it “fear speculation”: Investors may be hoarding paper oil not out of mere greed but due to the risk of a possible conflict outbreak in the near future.