Oil Price Surge: Scarcity vs Equilibrium

The price of oil has been on a wild ride over the past two decades, influenced by various global events such as wars in the Middle East and Ukraine, the Corona pandemic, and the global financial crisis of 2007/2008. After a relatively stable period from 1982 to 2002 with an average price of around $20 per barrel for Brent crude oil, the price has fluctuated between $25 and $130.

Currently, the world market price is at $103 per barrel, which is considered high compared to historical values. Dieter Wermuth, co-founder of Wermuth Asset Management, suggests that there may not be an equilibrium price for oil in principle, as demand has been increasing year after year while supply remains scarce.

The rising cost of oil affects countries that import net oil, causing their real incomes to shrink or grow more slowly than before. This is particularly challenging for households and businesses, which must cut back on spending or reduce growth plans. In contrast, oil-exporting nations such as the US, Iran, and those around the Persian Gulf reap significant benefits.

Wermuth points out that the increasing price of fossil fuels may actually be beneficial in reducing CO2 emissions, but achieving this goal requires even higher prices. The transition to cleaner energy sources is underway, with electricity from alternative sources becoming cheaper relative to fossil fuels and nuclear power.