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Commodity and oil boom. Causes and consequences.
Oil is running out, Chinese and Indian consumers are causing this. This is the headline that pervades the media. World oil consumption according to official government statistics is under 90 million barrels per day, however world oil reserves are 1.294 billion barrels. At current levels of consumption this gives under half a century of oil stocks. Oil is not running out any time soon. Secondly given the Indian and Chinese population the level of oil demand from these countries is much less than Europe and the US. The rate of increase of world oil consumption has been between 1-3% in the last 20 years. While oil prices have been increasing at a high rate, oil demand does not seem to be a conclusive determinant of the price changes. In fact the fact that the Iraq war has lead to significantly lower levels of oil production in Iraq as compared with pre-war levels, the conventional wisdom cannot simply offer Chinese and Indian demand as a primary driver of the oil price.
There is a political economic explanation that harkens back to the 1970s conflict in the Middle East. There oil was seen as a political tool and is evidently something that can effect a result of detente between competing powers. In essence, Middle East governments are aware of a growing presence of the US in this region and have become wary in avoiding obstructing this onslaught. At the moment when WMD were shown to not be present in Iraq, Middle Eastern government became aware of a potential threat from the US to their sovereignty. It would seem a reasonable hypothesis that the OPEC powers are interested in edging up oil prices to produce detente in the current Middle East war.
The second area is that the turning point in oil prices (some $20 per barrel around the turn of the 21st century) coincides with the bursting of the internet asset bubble, possibly as accumulated wealth became invested in higher yielding commodities such as oil traded on exchanges. In addition since the credit crunch has hit debt and asset markets there has been a flight to oil and commodities. The result of the centuries of accumulation through the introduction of capitalism or free market processes has lead to a lot of money chasing a limited amount of opportunities to increase wealth. The result is that when the economy is not evenly balanced in its opportunities for profit and capital growth there is the evident fact of unsustainable bubbles in those markets which are seen as having the least risk or greatest return when there are seen to be no other good opportunities. It is a direct effect of the imbalance in wealth among members of society and is the reason behind Asia and Japan's economic instability, the pound being ejected from the ERM and now in the US's housing- credit crisis.
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