When oil is cheap and oil spend is less than 2.5% of world GDP, the global economy tends to grow at a solid pace.
When oil consumption exceeds 4.5% of global GDP, the world economy typically faces either recession or stagnation (in the 1970s, 'stagflation', after 2011, 'secular stagnation').
In between, when oil consumption exceeds 2.25%, but is less than 4.5%, of GDP, growth can continue, but oil prices begin to weigh on the economy. Interestingly, oil prices are not stable in this 'no man's land'. That is, the demand-constrained price of oil is 1.75-2.5% of GDP; the supply-constrained price of oil is above 4.5%. The oil price will either fall to the demand-constrained price or rise to the supply-constrained price. There is no stable landing point in between.
Oil prices have moved back into 'no man's land' and are no longer cheap. The futures curve still believes oil prices will be demand-constrained in the 2020s, but given the extraordinary dependence of global demand growth on an ever-increasing Permian supply, the odds of it ending badly look high.
Our outlook now anticipates that the current business cycle will end in 2021 with oil spend averaging 5.1% of GDP for the year, representing an average price of $138 / barrel on a Brent basis.
Whether the price spikes higher depends on whether the advanced economies revert to 'fight' rather than 'flight' mode. In fight mode, as we saw from 2005 to 2008, the advanced economies were willing to enter into a bidding war with China for incremental barrels, a contest which the advanced economies were destined to lose.
This same competition emerged during the Arab Spring in 2011, with oil prices staying high thereafter, but never again reaching the $147 / barrel price seen briefly in 2008. Instead, the advanced economies consistently yielded oil consumption to emerging markets and were ground down in flight mode, with oil generally in the $100-115 / barrel range until the shale revolution tanked oil prices in 2014.
On balance, a resumption of grinding oil prices seems more likely, which would take peak oil prices for this cycle (which started in H2 2014) above $130 / barrel, but probably not to the $200 / barrel price we would see were animal spirits to revive in the advanced economies or the global oil supply materially disrupted.