The big uncertainty about the future of the world economy is the price of oil. Opinions differ about what will happen next. The truth is that no one knows.

Looking at the fundamentals of any good and deciding what the price should be is impossible. The Soviet Union proved this to be true. They analysed the fundamentals of goods and decided what the price should be, but they always got it wrong. They set the price of bread to low, so there were always shortages and people had to queue. Other prices were set too high, producing a glut of goods that nobody wanted.

No person or organisation has sufficient knowledge to determine what the price of any good should be. The benefit of markets is that prices go up and down to ensure that supply matches demand.

There are several factors that make the price of oil particularly hard to forecast. Some are negative and others are positive. An economic model that can accurately assess and weigh all these factors together to determine the future price of oil does not exist.

The Bad News about Oil

The Good Oil News

Slow Change

The usual pattern for most goods and services is that prices rise and fall to clear the market. If demand increases, the prices rise and supply increases to meet the new demand. If demand declines, the price will fall slightly, causing the supply to fall.

If either the supply or demand for a good does respond quickly to small changes in price, big price changes may be needed to clear the market. This is the situation with oil. (Economists describe this as inelasticity with respect to price, but you can forget that if you are not an economist).

The main reason for sharp fluctuations in the price of oil is that production does not respond quickly to changes in price. Prospecting for oil is a hit and miss affair that takes time. Bringing a new oil field into production takes several years. When there is no spare capacity, an increase in price does not lead to increased supply, because producers cannot bring new fields into production.

The other reason is that most of the large oil fields in the world are owned by government authorities. Politicians often cannot reduce their spending, because they depend on handouts paid for by oil money to stay in power. When prices fall, state-controlled oil companies do not cut production, because the politicians do not want to reduce their spending. The politicians do not respond to price signals, because they have a short-term focus that makes them unwilling to think further ahead than the next election, or the next coup.

The complexity of the production process and the complicity of the political process prevents oil supply from responding quickly to changes in price. This means that changes in demand can produce sharp fluctuations in price.


Many commentators blame speculators for manipulating the price of oil, but this is not as easy as they think. There are three ways that speculators can make money from a commodity like oil.

Be Prepared

In the longer term, the pressures on oil prices are mostly upwards. How fast and how far they will go up will depend on how quickly new supplies can be discovered and pumped and how quickly the world can reduce dependence on oil.

The West has developed a lifestyle, society and culture based on the automobile and cheap fuel. If oil prices were to rise dramatically, that lifestyle might become unviable, until new technologies emerge.

Christians should be thinking about this risk. How serious is it? What mitigations can we put in place? We should not bury our heads in the sand, but should be aware of the direction that the wind is blowing.

Christians have made the same commitment to an automobile-driven, suburban lifestyle. Much of our church life depends on automobile travel. We should be thinking about the risk for our church life and make mitigation where possible.