The Third Oil Shock: West Texas Intermediate, Monthly Nominal Spot Oil Price (1946-2008)

Oil price changes tend to be sudden and commonly permanent. Under the gold standard (US dollars redeemable for gold) that prevailed until 1971, oil prices were remarkably stable. The first two oil shocks, as well as the First Gulf War (1), were linked with geopolitical events that were short lived but the price level they created tended to endure. For instance, it took about 6 years after the Second Oil Shock to have a supply based counter shock (A). A third oil shock that began in late 2003 is unfolding with prices quadrupling as of June 2008. Unlike the two previous oil shocks, geopolitics play a more limited role as the surge in oil prices corresponds to a decline in the output of several mature oil fields, such as the North Sea and Mexico.

The current situation thus underlines forces that interact to create an environment involving higher oil prices; the supply appears to be unable to keep up with the demand. Peak oil is what it means, a physical inability to provide a higher level of oil supply. It must also been considered that rising oil prices are the outcome of the systematic debasement of most fiat currencies through the inflation of the money supply, this in addition to any physical shortages (the current environment appears to be compounding both). So, even if a resource such as petroleum could be supplied adequately, monetary policies followed by most central banks and governments guarantee higher energy prices.

The table below underlines the events that had the most significant impacts on oil prices.