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03 March 2024

IEA says high oil prices pose real economic risk


Oil prices near the $100 a barrel level already pose a real risk to the world economy, the IEA warned on Tuesday, as it said Chinese daily demand broke through 10 million barrels for the first time.

"Recent price levels already pose a real economic risk -- something of deep concern to producers and consumers alike," the International Energy Agency said in its latest monthly Oil Market Report.

Oil prices of $100 a barrel represent an 'oil burden' of five per cent of gross domestic product on the global economy, the IEA calculated, and said such levels in the past "have clearly been associated with economic problems.

"Ultimately, oil producers, financial investors and consumers (notably import-dependent developing countries) all suffer under such a scenario," said the report.

Optimism about the global economic recovery and interest from bullish investors have pushed crude prices close to $100 a barrel in recent sessions, levels last seen in October 2008.

The rise in crude has also been attributed to a harsh winter hitting Europe and parts of North America, as well as growth in China and other developing nations.

Oil was mixed in afternoon Asian trade Tuesday, with New York's main contract, light sweet crude for February delivery, dropping 50 cents to $91.05 a barrel and Brent North Sea crude for March delivery up 21 cents at $97.64.

The IEA, the energy policy and monitoring arm of the 34-member Organisation for Economic Cooperation and Development, said growth in oil demand in 2010 was at one of the strongest rates in three decades, albeit from a low crisis level.

Oil demand grew by 3.2 per cent, an increase of 2.7 million barrels per day (mbd) year-on-year, it said.

Moreover, "such demand strength appears to be more related to a buoyant economic recovery than to the frigid weather conditions that prevailed in most of the northern hemisphere in late 2010."

The IEA said preliminary data showed China's oil demand raced ahead 15.1 per cent year-on-year in November, driven in large part by government-mandated closures of coal-fired plants to meet pollution targets that spurred use of small-scale electricity generators run on gasoil.

"Total demand has thus reached new historical highs (10.2 mbd), surpassing for the first time the symbolic 10 mbd threshold," said the IEA.

Given that the pace of economic recovery is widely forecast to slow down in 2011, the IEA forecast growth in oil demand to slow to 1.6 percent for a gain of 1.4 mbd year-on-year to 89.1 mbd.

The Opec oil cartel, which pumps 40 per cent of world crude, revised upwards its 2011 world demand growth estimate on Monday, given the pace of global economic recovery and cold winter weather in the northern hemisphere.

The Organisation of the Petroleum Exporting Countries (Opec) said it was pencilling in world oil demand growth of 1.23 million barrels per day to 87.32 million for this year, a 1.43 per cent jump compared with 1.37 per cent previously forecast.