How Rising Oil Prices Could Derail the Global Economy

The price of oil is, perhaps, the single most important price in the world. The cost of almost everything we do at home, at work and at play is affected by it.

Cheap oil made much of the economic growth and progress of the 20th century possible.

If the cost of oil is high, the cost of food goes up, the cost of manufacturing goes up, and the cost of transportation goes up. That leaves us with less to spend on everything else – whether it’s food, accommodation, goods and services, or investment.

A rising oil price also tends to mean rising inflation, which puts pressure on interest rates to rise as well. So the last thing policy-makers need right now is a high oil price.

But they’d better brace themselves. That could be just what’s coming.

The Oil Price is Warming Up for a Major Move

Oil appears to have dropped off the radar somewhat over the last couple of years.

In the volatility of 2007-08, the words ‘Peak Oil’ were on everybody’s lips and the price of light crude (the West Texas Intermediate – WTI – benchmark) went all the way from $50 up to $147 then back down to $35 a barrel.

There was then a two-year bull market, which began in the spring of 2009 at $33 and ended in the spring of 2011 at $115.

Since then light crude oil has been fairly settled. Over the last two years, it has been making a series of higher lows: $75, then $77, then $84, then $85 last month.

But at the same time the highs have been getting lower: $115, then $110, then $100, then $97. In other words, its trading range has been getting narrower and narrower. And it’s discreetly crept off the headlines.

A long period of consolidation – such as this – can portend a sustained move. As the saying goes, ‘The bigger the base, the higher in space’.

Here’s a chart showing oil over the last seven years. The narrowing trading range that I am speaking about is quite clear.

And as you can see, the price has just moved above the red falling trend line, so there is a hint that it is ‘breaking out’. For now, I don’t think this is too significant. It’s largely a function of the US dollarweakness we have seen over the last month.

And I wouldn’t be at all surprised to see oil fall back to $95 or so within the next few days – back within those two red lines. But I do see this long-term base we are building as very significant.

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