THE PRICE OF OIL has risen by more than half since the beginning of April. It's time for a pause in the celebration of falling oil prices. Oil is still cheap by last year's standard, but a pattern is emerging that ought to make the industrial countries wary.
At the turn of the year oil cost about $27 a barrel. By the end of March, it was being traded on the spot market at hardly more than $10. Now it's hovering around $17. A classic case of a market price overshooting and recovering, you might say. But the rise over the past seven weeks is more than a trivial correction, and the reasons for it are worth attention.
American consumption of oil is rising. It's not rising very fast, but, since American domestic production is level, any increase falls directly on the international markets in which prices are set. Even small rises in sales currently have a sharp impact on prices, because the American oil companies are operating with unusually low inventories. Nobody wanted to be caught with full tanks when prices were falling. But it means that there's no shock absorber in the system when people begin to drive a little more -- as they are now beginning to do. The refiners are going into the annual surge in gasoline sales with inventories that, according to the Energy Department's figures, are only narrowly above the line at which local shortages might begin to appear.
Perhaps other causes also contributed to the higher prices. There was a strike in the Norwegian offshore fields that briefly diminished the world's supply. There was a drop in Saudi Arabian exports because Iranian attacks on Persian gulf shipping interrupted, for a short time, the parade of tankers from the Saudi ports. Those are not uncommon minor disruptions in the oil trade, but they reminded the traders that their business is full of hazards.
This kind of extreme volatility is probably going to be the rule in oil pricing for a while. The idea that prices will now settle to some stable level is an appealing one, but there's no reason to put any faith in it. Prices will swing with unexpected events, and recent experience suggests that they will swing sharply. There is no normal or natural price for oil.
For the American economy, oil at $17 a barrel is preferable to oil at $27. But the wild drop of the winter months is not going to be repeated. It was glorious good luck that it happened while the dollar's exchange rate was also falling. Cheap oil has so far offset the inflationary effects of a cheap dollar. But the inflationary pressures generated by the decline of the dollar are going to persist for many months ahead, while the decline in oil prices seems clearly to have ended.