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Oil's $100 milestone was a surprise

By The Daily Telegraph

A lone trader in search of a headline may have caused the oil price to hit $100 for the first time, but what is really interesting about crude’s flirtation with three figures is that it should have happened against such an unpromising economic backdrop.

Few traders would have bet on a spike in the price on the day that a widely watched economic survey gave a clear signal that America is heading towards recession.

The law of supply and demand would lead you to expect the oil price to fall on such uncompromising evidence of a slowdown. But the relationship between oil and the wider economy has been out of whack for some time. One of the curiosities of the tenfold rise in the oil price in recent years has been its lack of broader impact.

When oil was last at this level in inflation-adjusted terms a generation ago, it caused a global slump. This time round the economy has barely missed a beat. How high does the oil price have to go before the pips start to squeak?

It is all about cause and effect. The reason the oil price has been so strong until recently was the strength in global demand. Because the rising oil price was the result of a strong economy it is unsurprising that the rise did not cause a slowdown. Increasingly, however, it looks like the oil price is staying high for less sustainable reasons. The $100 barrel is less about the global demand boom that has accompanied the integration into the world economy of China than about supply fears and the impact of speculation.

It is impossible to know how much of the current price is due to each of these factors, but both are much more prone to a rapid reversal than the China demand story.

Opec can open the spigot wider and if oil is still close to $100 a barrel when it next meets in February, it almost certainly will. Traders can change their bets in the blink of an eye. Of course oil could spike higher but with a quarter of global production still burned in the slowing US economy, I will not bet my house on it.


The oil producing countries’ inability to match surging consumption with supply prospects is beginning to ring alarm bells about their future export capacity, according to Dow Jones Newswires.

Opec figures show domestic fuel consumption within the group has been doubling at more than twice the rate of exports since 2000.

Opec, which supplies 40 per cent of the 85 million barrels consumed globally every day, could see its crude exports fall by as much as 2.5m barrels a day by 2010 as rising consumption cannibalises exports, warned a recent report by CIBC World Markets, the investment banking unit of Canadian Imperial Bank of Commerce.

“The gap between slowly increasing production and rapidly increasing demand is getting narrower,” said Fatih Birol, the International Energy Agency’s chief economist.


Major non-Opec producers such as Mexico and Russia are facing similar pressures. Mexico, the number two foreign oil supplier to the US, is dogged by declining output and by some estimates could become a net oil importer within five to 10 years. Rising domestic consumption is also set to cut into Russia’s export capacity.

Critics also say subsidies are inefficient, encouraging fuel smuggling as cheap oil is taken across borders and sold at a premium. Subsidies may also lock out much-needed investment from the oil refining and distribution sectors by making it impossible to turn a profit.

“No one invests in a business if he does not see how he is going to get his returns,” said Nigerian Oil Minister Odein Ajumogobia. The International Monetary Fund also argues that fuel subsidies divert public money away from more worthwhile efforts to protect the poor. About 2.6 billion of the world’s poorest people rely on wood, dung and agricultural waste for energy; fuel subsidies do little to help them, while those in higher-income brackets benefit from cheap oil to drive cars and heat homes. (The Daily Telegraph)