Larry Elliott

Fresh from his mauling in the by-election in Crewe in the north west of England, the UK premier Gordon Brown met two leaders. One was the Dalai Lama; the other, Hamad bin Jasim bin Jabir al-Thani, prime minister of oil and gas rich Qatar, may have more influence on the PM’s chances of political survival.

Brown’s spokesman said his boss was “incredibly focused” on oil — little surprise at the end of a week that saw the price of crude rocket to a record $135 a barrel and revived memories of the energy shortages and economic hardship of the 1970s. The memories came flooding back: a seemingly unstoppable rise in the cost of crude; fears that the west would suffer the debilitating combination of rising prices and weak growth known as stagflation; daily comments from the oil cartel OPEC on what it might or might not do to help the developed world out of its fix; demands by British and US leaders that the producers should do more.

Although oil ended the week at $132 a barrel, forecasts that crude could soon be changing hands for $150 or even $200 also conjured up images of what life might be like once the cheap oil that has been crucial to the development of modern industrial societies, and is used for everything from food packaging to tourism, runs out.

For the past 10 years or more, the leaders of the G8 countries have concentrated on the problems of the developing world when they gather for their annual summer summit. This year Brown wants oil to be at the top of the agenda and, with every other member apart from oil rich Russia feeling the pinch, he is unlikely to face much opposition. Oil prices are more than six times higher than they were in early 2002, and it took only a fourfold increase in 1973 and 1974 to bring the west’s long postwar boom to a shuddering halt. This is the fourth time that oil prices have soared in the past 35 years; on the previous three occasions dearer energy has meant recession.

Graham Turner, of London-based consultancy GFC Economics, said: “Oil prices are on a moon-shoot, with peak oil and a global shortage taking centre stage. Many of the concerns about long term supplies are valid and it is impossible to know how far prices will climb in the coming weeks and months. However, if calls for $150 per barrel are realised by the summer, it will do little to help a world economy struggling with a slide in housing markets across much of the industrialised west.” Opinions differ as to the cause of the recent spectacular rise. Brown blames OPEC.

Brown said: “It is, as people will recognise, a scandal that 40% of the oil is controlled by OPEC, that their decisions can restrict the supply of oil to the rest of the world, and that at a time when oil is desperately needed and supply needs to expand, that OPEC can withhold supply from the market.” OPEC’s response has been to say that the market is adequately supplied with oil and the $35 rise in crude prices since the start of April are purely down to speculation. Economic theory suggests that rising prices encourage rising supplies, but investment in the oil industry is expensive and takes a long time to bear fruit. In the past, oil companies have had their fingers badly burned when prices have crashed and they are wary of over-committing. The International Monetary Fund said the boom has led to higher investment but much of it has been soaked up by shortages of equipment and skilled personnel.

“Oil will increasingly come from unconventional sources, because output has declined from peak levels at conventional fields in many countries, and the size of oilfields is getting smaller on average. This does not mean that the world is about to run out of oil, but it suggests that higher oil prices are needed to induce the additional investment required to balance the market over the medium term.” Turner said it was worrying that the markets ignored the Saudis’ announcement that they would pump an additional 300,000 barrels per day. “Saudi Arabia is struggling to stem a long term reversal in production, and any offer to boost output raised the prospect of a steeper drop from 2009, when the decline in global supplies is expected to accelerate. It is perhaps telling that futures prices have climbed even more quickly than the spot market, underlining the very real fears of peak oil.”

If the peak oil theories are right, the market frenzy seen this week is likely to return even if prices drop back temporarily when the bubble bursts. “Because the price of oil is particularly vulnerable to global events, it will always be volatile, displaying peaks and troughs like a hospital monitor tracking an irregular heartbeat,” said Andrew Simms of the New Economics Foundation. “What’s different today is that there is no way back compared to the price hikes of the 1970s. There are no ‘swing producers’ to fill the gap. Even the more conservative estimates for the global peak of oil production give us little more than a decade before supplies plateau and begin a long decline.”