Thursday, April 21, 2005

Over the top?

A French investment bank says that oil prices could reach $380 a barrel by 2015. Even the most pessimistic peak oil theorists have failed to reach for numbers so high. The bank's analysis is that supply will fail to keep up with demand by a wide margin. But the authors of the report do not predict an actual decline in oil production.

This straightline scenario, however, seems highly unlikely. I believe the world would be thrown into a deep recession long before that level is reached. A recession, of course, would dampen demand and bring prices down. But, I can see a scenario that is consistent with the bank's notion that supply lags demand in a big way during the next 10 years. That scenario is several recessions, each followed by weak growth and high inflation. Something like what we experienced in the 1970s only worse.

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