Where will oil prices go in the next five years?

David King, who was Chief Scientific Office for the Blair government for seven years until 2007, has added his voice to the growing body of experts who are worried about eh price of oil. He claims that governments across the world are ignoring the risk of there not being enough oil to meet demand from 2015 and beyond.

I have already written about the amount of oil that the world has left. It is a position that constantly needs re-evaluating and each of my re evaluations has been downwards in recent years. It is always hard to predict the future but I shall try.

I am cynical about the reserves declared by the oil companies and the oil producing nations. I believe, and I admit my belief is a gut feeling, that reserves have been declared at high figures than are warranted. That means that there is less oil left than we think.

I believe that oil has already peaked in terms of its production, in 2008. I do not think we shall see as much oil produced again, although it will take probably five or six years for the bell curve to reach the stage where there will be shortages on the market.

I also believe that the existing recession has disguised the shortage of oil by creating less demand for it. Economies now appear to be coming out of recession; economically and psychologically this is the most difficult time for people because they have only just come out of denial and are now facing the reality of “cuts” which means having and consuming less. As the economies start to grow, so the demand for oil will increase.

It also seems clear that the developing nations – China, India, Brazil, México, for example – all will continue to grow economically, that that growth will be relatively high as they meet the demands of a world coming out of recession and as their own people achieve higher standards of living, which means, among other things, more oil will be consumed.

Finally, Mr Obama has described the Deepwater Oil spill as the environmental 9-11. He is wrong about that because the environmental 9-11 is not a single event but has been the past forty or fifty years of profligate emission creating but all the developed world, led by The United States, Australia, Canada and parts of the European Union. Environmental costs of oil extraction are becoming significant risk factors for oil companies. The precedent that Mr Obama has now set with BP will be closely followed by future governments throughout the world whenever any oil company has a spillage or another environmental disaster.

The effect of Mr Obama’s stance will be not only to restrict oil extraction in the dep sea but also to make oil extraction much more costly; the oil companies will need to pass these costs on to the consumer.

These factors all conspire to create an ever higher oil price and a shortage of oil, which Mr King suggest will happen in 2015. I suspect that Mr King has got it about right. I would suggest that we will see ever higher oil (and natural gas) prices for the next five years with rationing beginning to be discussed in 2015 or 2016.