Investment bank Goldman Sachs on Wednesday warned of the potentially damaging effect for stock market investors of high oil prices, dubbing the process "the revenge of the old economy."
Peter Oppenheimer, the bank's head of European strategy, made one of the first attempts to place a precise estimate of the effect on stock markets of persistently high oil prices. He warned that a 20 percent rise in oil could result in a 15 percent knock to equity markets if other factors remain neutral.
He did not forecast that it would happen -- he still thinks a sideways movement in European stock markets is most likely -- but warned that oil price risks are "skewed significantly to the upside," especially if there is further disruption to existing production.
Jeffrey Currie, Goldman's European head of commodities, added that "a deep fundamental shift" has taken place in the oil market in the past three to four weeks. It is not just short-term spot oil prices that have risen, but prices for oil for delivery in 10 years' time have risen to over US$35 a barrel.
"What that is telling you is that there is potential for sustainability of these higher prices," Currie said.
He said the seeds of the crisis were sown over the past two decades as poor rates of return of energy-related investments persuaded investors to switch capital into the "new economy" industries such as telecoms and technology.
"We are not arguing that we are running out of oil; there are substantial re-serves," Currie said. "What we are running out of is the infrastructure to access, supply and deliver that oil. The last time we build infrastructure on that scale was the 1970s."
He estimates that industry investment now needs to run at US$200 billion a year.
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