Flip through the latest issue of Gulf Weekly.
There was a time, not so long ago, when analysts were competing over how high oil prices would go by the end of the year. Within months, the global financial crisis and worldwide downturn have negated those predictions.
Star gazers were severely hurt, and
Oil has now fallen more than 60 per cent from July’s record $147.27 a barrel and has gone below what is widely considered to be the average operating cost, or ‘cash cost’, for the world’s major oil companies around $50 a barrel.
However if the pace of the downturn picks up, world oil prices could easily drop far below $50 a barrel and might even slip towards $40 or perhaps $35, analysts and economists say.
Many analysts think the market is likely to fall further, breaching the psychological $50 barrier before recovering.
But how low would prices go? What we have is rather a random estimate, somewhere around $35. When would that be? It should happen in the next month, after which the output cut announced by Opec two months ago will start working in the market.
Meanwhile, the International Energy Agency (IEA), which advises 28 industrialised countries, has slashed its global oil demand growth forecasts.
It says demand has grown this year at the slowest rate in a generation and next year it is expected to expand by only 350,000 barrels per day (bpd). World oil demand is now expected to average 86.2 million barrels per day (mbpd) in 2008, rising to just 86.5 mbpd in 2009.
Much has been made out of falling oil prices. The bulls have described it as a collapse. Of course, but a ‘collapse’ to the $60-$70 range is a collapse only if one forgets that the average oil price in 2007 was $72 a barrel and $66 in 2006.
The tight balance between supply and demand was not the only factor driving the increase in oil prices.
The last explosion in oil and other commodity prices began in the late summer of 2007, as a weakening dollar set off a ‘flight to commodities,’ says Daniel Yergin, Cambridge Energy Research Associates (Cera) chairman.
Oil prices were also driven up throughout July 2008 by psychology. Professor Robert Shiller of Yale describes it as ‘contagious excitement about investment prospects’.
It was almost like bets in a poker game, with a $200 prediction being raised by a $250 prediction, which would in turn be raised by a $500 prediction. It was all self-reinforcing, creating its own reality.
The world oil market is caught in what Cera two years ago called a ‘Global Fissure’ recession scenario. Total
The fall in oil prices is a great relief to hard-pressed consumers. If you compare the average US petrol price in July ($4.14 a gallon) with October ($2.26) on an annualised basis, the savings to American consumers are $282 billion.
The fall in oil prices is a sort of de facto tax cut – a stimulus package that does not have to be approved by the Congress or paid for out of the beleaguered Treasury, says Yergin.
What will happen to oil prices in Global Fissure? One of the most important determinants, just as in the 2003-2007 increases, is the pace of global economic growth.
But, this time, the question is how deep and long the recession and how big the hit on consumer spending.
The other crucial question is oil supply itself. How large will be the flow of new oil supplies that have been stimulated by the rising prices and have been under development but were delayed by shortages of people and equipment?
Nevertheless, lower prices are forcing energy companies to cut their budgets and hold back on starting some new projects.
The energy policies of the new
A ‘green stimulus programme’ is already high on the transition agenda. But the worried question around the world now is: to what degree lower prices will crimp investment in renewables and efficiency.
