Projections for oil prices to hit $100 per barrel overlook key questions over the future of demand, according to Mohamed El-Erian, chief economic advisor at Allianz and chair of Gramercy Fund Management.
Both international benchmark Brent crude and U.S. crude prices have spiked above $80 in recent weeks as post-pandemic demand outstrips supply. Surging natural gas prices have also caused crises around the world, most notably in Europe.
Speaking to CNBC’s Dan Murphy at the ADIPEC energy conference in Abu Dhabi, El-Erian said he agreed with earlier remarks by Sultan Ahmed Al Jaber, CEO of the Abu Dhabi National Oil Company, that global markets had “sleepwalked” into the energy crisis.
El-Erian said two situations had come to pass which would have been deemed unlikely if not unthinkable a year ago. Firstly, that demand would surge and supply would be unable to catch up, and secondly, that the predicted energy transition itself would pose challenges because transition fuels are not “amply available.”
Although noting that market watchers had not anticipated $80 per barrel oil prices at the beginning of the year, he dismissed suggestions that they could top $100.
“If you were to focus only on the supply side, you could get to oil at $100, because there has been underinvestment in the industry in general, and demand will stay robust,” El-Erian said.
“But if you look at what is happening on the demand side, there you get some questions. Demand is robust today but will it be robust in six months’ time? There is really big questions in terms of demand destruction — people buying less because prices are higher — and in terms of whether policy becomes contractionary or not.”
OPEC and its oil-producing allies agreed earlier this month to maintain its current output levels, opting not to loosen the taps in the face of oil prices at multi-year highs and calls from Washington for measures to cool the market.
While the prospect of further sharp rises to oil prices does pose a risk to the global economic recovery, El-Erian argued that it was quite far down the list of risks, the most prominent of which is a “miscalculation in inflation” from central banks.