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“A public mourning raises the price of black cloth, with which the market is almost always under-stocked on such occasions,” wrote Adam Smith during the age of steam, more than two centuries before analysts at Goldman Sachs forecast that oil prices would rise beyond $100 a barrel. As crude was trading at around $60 at the time, that was a brave call. But now prices are tumbling. Crude has fallen by 28 per cent to $108 since it peaked six weeks ago. How low might it go – below $100 even? The ghost of Smith might have some thoughts.

Smith distinguished between the “market price” of a commodity and its “natural price” - equivalent to the marginal cost of production. For oil, this is reckoned at around $70 a barrel today. High demand can separate these two prices “according to either the greatness of the deficiency, or the wealth and wanton luxury of the competitors”. Yet only for so long. Supplies can rise – as in the recent discovery of giant Brazilian offshore fields. And demand can fall – sometimes very sharply. The International Energy Agency recently cut its estimate of US oil demand by 6 per cent. Eventually, Smith wrote, the market price will fall back to the natural price “to which the prices of all commodities are continually gravitating”.

By this rubric, oil has further to fall. If alive today, Smith might therefore be shorting oil futures – just what Ospraie’s shuttered commodity hedge fund failed to do. Yet there is a snag. “The scarcity of peculiar soils,” Smith added, means that certain commodities can sell at high prices “for whole centuries”. For “peculiar soils” read instability in places like Georgia. Furthermore, the “particular regulations of police” can also keep commodity prices high. For “police”, read the Organisation of Petroleum Exporting Countries, which meets next week with falling oil prices on its mind. All this ensures an enduring premium over Smith’s “natural price”. $100 a barrel used to be thought of as a ceiling; now it is a floor.

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