By Michael Arbow, MBA
Partner, RSD Solutions Inc.
Last week the IMF raised its expected average price of oil for 2011 from $89 to $107 (20%); about where it is as this blog is written. Note: that is the yearly average so you can expect spikes above that during the year. IMF expectations for 2012 are $108: so the IMF is advising us to say goodbye to double digit oil prices and hello to Jeff Rubin’s world of triple digit oil. What the IMF’s guesstimate is also saying is that even the surplus supply of oil is tight and that even after geopolitical tensions ease don’t expect prices to drift far below $100.
This view of a tight global supply for crude is being confirmed by the International Energy Agency. From a risk perspective what is coming into play now is demand destruction – the high price of a commodity that decreases the demand for the high priced good but which can also decrease the demand for other goods. This will likely be the case for oil as it is broadly considered a necessity for Western economies to operate. Thus expect reduced demands for air travel, weekend jaunts to the country and restaurant meals. This oil lead demand destruction will then translate into changes of behavior and possibly price increases for energy or activity substitutes. The question is, will this positively or negatively affect your business and how is your risk team advising you to live in this triple digit oil environment.
For more on the International Energy Agency’s view of oil, click on the link to BBC news:
http://www.bbc.co.uk/news/business-13047854
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