Oil|Oil News and Videos
Oct
01
Filed Under (Environment) by oil
Daniel Yergin asked:
With eyes focused on whether and when oil breaks through the $100 barrier, it turns out that $100 a barrel is really $99.04, at least in terms of the all-time record, according to Cambridge Energy Research Associates (CERA).
CERA, an IHS company (NYSE: IHS), finds that the inflation-adjusted high of $99.04 in today’s dollars, $39.50 in 1980 dollars, was reached during the spring of 1980 when geopolitical turbulence in the Middle East, and Iran in particular, created acute uncertainty about the reliability and adequacy of oil supplies from the world’s most important oil exporting region.
“Breaking the historical high of $99.04 per barrel will be a landmark in itself,” said James Burkhard, managing director of the Global Oil Group at CERA. “It will certainly have psychological impact since it will intensify momentum for the market to hit $100 per barrel. And it will have a concrete effect since it pushes the world economy deeper into uncharted territory-the oil price range which can contribute to an economic slowdown.”
CERA’s calculation of $99.04 is based on the April 1980 nominal average posted price of $39.50 per barrel for West Texas Intermediate. This is a monthly average price since, at the time, there was no crude oil futures market to provide a daily price. Crude oil futures trading did not begin until 1983. The translation of the nominal prices into 2007 U.S. dollars is based on the U.S. Consumer Price Index using annual averages.
“There are different indexes and methods that can be used to adjust prices to inflation,” Burkhard said. “These methods can result in prices that are lower or higher than our $99.04 per barrel calculation. However, we believe that using an annual average inflation rate provides the best basis for comparison between 1980 and 2007, and that is what makes $99.04 the benchmark for today.”
$100 OIL: WHAT IT MEANS
The oil price in recent weeks has taken on the trappings of a sporting record that once seemed untouchable. Now it is broken with such regularity that what has historically been viewed as a distant prospect-$100 per barrel oil-is in sight. The world has never experienced a triple-digit oil price. The all-time inflation-adjusted high was in April 1980, when, CERA calculates, crude oil hit $99.04 per barrel in terms of 2007 US dollars. The broader significance of a $90-$100 price range is that it highlights in dramatic fashion how different the oil market environment, and indeed the world economy, is today compared with the past two decades.
Daniel Yergin, chairman of Cambridge Energy Research Associates, made the following statement with regard to the rising price of oil:
“The oil market is demonstrating both ‘fright and flight.’ Instead of the proverbial ‘flight to the dollar’ in times of economic uncertainty, we’re now seeing ‘a flight to oil.’ The strengthening of oil since August is responding, in part, to the weakening of the dollar. For the last few years, the force behind rising oil prices has been strong global economic growth. Over the last several weeks, the market focus has shifted to economic weakness in the United States. At the same time, tension over Iran’s nuclear program will continue to recharge anxiety on a continuing basis in the oil market.
Historical assumptions about the dynamics of oil prices, demand, supply, and the global economy have given way to a new, but still unfolding, paradigm. This new paradigm is not without risks and dangers. The world economy can withstand the headwinds of very high oil prices much better than in the past, but prices of $90 to $100 push geopolitics and the economy deeper into uncharted territory. High oil prices will tend to exacerbate geopolitical tensions in the short term and create a sharper divide between the winners and losers of a very high oil price environment.
Today’s price levels bring us farther into the range where the oil price can contribute to an economic slowdown. The effect on economic and oil demand growth depends on the duration of $90-$100 oil. Although not widely recognized in the face of the attention on the record, for 2007 the year-to-date annual average for West Texas Intermediate is just $70- not $100.
Burkhard continued: “The reaction to oil prices varies much around the world, owing to differences in income levels, taxes, subsidies and the relative use of oil in a national economy. But, if oil prices were to average around $110 for six months or more, it would increase the world economy’s vulnerability to a serious downturn of the early 1980s’ type. But even prices in the $90s have negative impacts on the economy and consumer spending. We just haven’t seen the full effects yet, for the year-to-date annual price for oil this year has been $70- not $100!
“CERA’s Break Point scenario (as described in CERA’s Dawn of a New Age: Energy Scenarios to 2030 study) demonstrates that $120-plus prices would not only have major economic impact, but would lead to much stronger conservation policies among consuming countries and would greatly accelerate innovation and efficiency and a move away from oil, even in transportation.”
High oil prices in the 1970s set the stage for the most severe global downturn since the Great Depression. Indeed, the high prices of 1980 were at the beginning of the worst three-year period of economic growth of the past four decades. For the oil price to potentially play a similar role in a significant economic slowdown, prices would have to average from $100 to $120 per barrel for six months to a year. To be sure, negative economic repercussions on consumer spending and economic growth will also materialize even at prices in the $90s range. Also, of course, oil prices do not exist in a vacuum, but will interact with other economic developments, particularly the unfolding consequences of the credit crunch.
The jump in price from $75 at the beginning of September to the mid-$90s in early November highlights the dominant sentiment driving the oil market-that oil supply will be unable to keep pace with rising demand. The market may hit prices above $100 unless signs emerge that the oil price has reached a level that is reducing economic and oil demand growth. However, if oil demand growth hits the brakes or if supply anxiety eases, we could see a steep fall in price.
Daniel Yergin added: “Oil prices at this level will themselves be a negative in conjunction with everything else going on in the U.S. economy. While $60 or $70 oil had little effect on the economy, that does not mean the same will hold true for $100 oil. One point is obvious - we’re much more likely to see an impact on demand at this higher price level, especially in the context of a slowing economy.
“A continuing downslide for the dollar will put oil on an upslide.”
GREGORY
With eyes focused on whether and when oil breaks through the $100 barrier, it turns out that $100 a barrel is really $99.04, at least in terms of the all-time record, according to Cambridge Energy Research Associates (CERA).
CERA, an IHS company (NYSE: IHS), finds that the inflation-adjusted high of $99.04 in today’s dollars, $39.50 in 1980 dollars, was reached during the spring of 1980 when geopolitical turbulence in the Middle East, and Iran in particular, created acute uncertainty about the reliability and adequacy of oil supplies from the world’s most important oil exporting region.
“Breaking the historical high of $99.04 per barrel will be a landmark in itself,” said James Burkhard, managing director of the Global Oil Group at CERA. “It will certainly have psychological impact since it will intensify momentum for the market to hit $100 per barrel. And it will have a concrete effect since it pushes the world economy deeper into uncharted territory-the oil price range which can contribute to an economic slowdown.”
CERA’s calculation of $99.04 is based on the April 1980 nominal average posted price of $39.50 per barrel for West Texas Intermediate. This is a monthly average price since, at the time, there was no crude oil futures market to provide a daily price. Crude oil futures trading did not begin until 1983. The translation of the nominal prices into 2007 U.S. dollars is based on the U.S. Consumer Price Index using annual averages.
“There are different indexes and methods that can be used to adjust prices to inflation,” Burkhard said. “These methods can result in prices that are lower or higher than our $99.04 per barrel calculation. However, we believe that using an annual average inflation rate provides the best basis for comparison between 1980 and 2007, and that is what makes $99.04 the benchmark for today.”
$100 OIL: WHAT IT MEANS
The oil price in recent weeks has taken on the trappings of a sporting record that once seemed untouchable. Now it is broken with such regularity that what has historically been viewed as a distant prospect-$100 per barrel oil-is in sight. The world has never experienced a triple-digit oil price. The all-time inflation-adjusted high was in April 1980, when, CERA calculates, crude oil hit $99.04 per barrel in terms of 2007 US dollars. The broader significance of a $90-$100 price range is that it highlights in dramatic fashion how different the oil market environment, and indeed the world economy, is today compared with the past two decades.
Daniel Yergin, chairman of Cambridge Energy Research Associates, made the following statement with regard to the rising price of oil:
“The oil market is demonstrating both ‘fright and flight.’ Instead of the proverbial ‘flight to the dollar’ in times of economic uncertainty, we’re now seeing ‘a flight to oil.’ The strengthening of oil since August is responding, in part, to the weakening of the dollar. For the last few years, the force behind rising oil prices has been strong global economic growth. Over the last several weeks, the market focus has shifted to economic weakness in the United States. At the same time, tension over Iran’s nuclear program will continue to recharge anxiety on a continuing basis in the oil market.
Historical assumptions about the dynamics of oil prices, demand, supply, and the global economy have given way to a new, but still unfolding, paradigm. This new paradigm is not without risks and dangers. The world economy can withstand the headwinds of very high oil prices much better than in the past, but prices of $90 to $100 push geopolitics and the economy deeper into uncharted territory. High oil prices will tend to exacerbate geopolitical tensions in the short term and create a sharper divide between the winners and losers of a very high oil price environment.
Today’s price levels bring us farther into the range where the oil price can contribute to an economic slowdown. The effect on economic and oil demand growth depends on the duration of $90-$100 oil. Although not widely recognized in the face of the attention on the record, for 2007 the year-to-date annual average for West Texas Intermediate is just $70- not $100.
Burkhard continued: “The reaction to oil prices varies much around the world, owing to differences in income levels, taxes, subsidies and the relative use of oil in a national economy. But, if oil prices were to average around $110 for six months or more, it would increase the world economy’s vulnerability to a serious downturn of the early 1980s’ type. But even prices in the $90s have negative impacts on the economy and consumer spending. We just haven’t seen the full effects yet, for the year-to-date annual price for oil this year has been $70- not $100!
“CERA’s Break Point scenario (as described in CERA’s Dawn of a New Age: Energy Scenarios to 2030 study) demonstrates that $120-plus prices would not only have major economic impact, but would lead to much stronger conservation policies among consuming countries and would greatly accelerate innovation and efficiency and a move away from oil, even in transportation.”
High oil prices in the 1970s set the stage for the most severe global downturn since the Great Depression. Indeed, the high prices of 1980 were at the beginning of the worst three-year period of economic growth of the past four decades. For the oil price to potentially play a similar role in a significant economic slowdown, prices would have to average from $100 to $120 per barrel for six months to a year. To be sure, negative economic repercussions on consumer spending and economic growth will also materialize even at prices in the $90s range. Also, of course, oil prices do not exist in a vacuum, but will interact with other economic developments, particularly the unfolding consequences of the credit crunch.
The jump in price from $75 at the beginning of September to the mid-$90s in early November highlights the dominant sentiment driving the oil market-that oil supply will be unable to keep pace with rising demand. The market may hit prices above $100 unless signs emerge that the oil price has reached a level that is reducing economic and oil demand growth. However, if oil demand growth hits the brakes or if supply anxiety eases, we could see a steep fall in price.
Daniel Yergin added: “Oil prices at this level will themselves be a negative in conjunction with everything else going on in the U.S. economy. While $60 or $70 oil had little effect on the economy, that does not mean the same will hold true for $100 oil. One point is obvious - we’re much more likely to see an impact on demand at this higher price level, especially in the context of a slowing economy.
“A continuing downslide for the dollar will put oil on an upslide.”
GREGORY
Oct
20
Filed Under (Environment) by oil
Palm Oil Truth Foundation asked:
By Frank Tate
Have you ever noticed that a herd of lembu or cows, all tend to move together in the same direction? Have you often wondered why this phenomenon occurs?
Imagine that you are taking a slow and leisurely drive along one of Malaysia’s lovely scenic country roads, away from the speeding juggernauts and cars on the North South highway. As you drive, you take in all the rolling fields of lalang, oil palm plantations stretching as far as the eye can see. Suddenly, something catches your attention. It’s a herd of lembu up ahead, in a nearby open field. Curiosity gets the better of you and you park off the road to investigate further. And there, you stand beside your car, in the middle of nowhere, watching the herd instinct in action.
For unexplained reasons, you scramble towards a low wooden fence and catch up to the lembu as the herd slowly makes its way across the field of lalang. Curious as to why they would all move in the same direction, you look towards the center of the herd and wonder aloud: “Why are all the lembu walking in this particular direction, as if on auto pilot?”
When I ask this question at all my seminars, the response I hear from delegates from all over the world is invariably the same: “They’re all moving in the same direction because everybody else is!”
People and organizations too are like this herd of lembu. They too are strongly influenced by the direction of the surrounding herd. Just take a look at the behavior of some NGO’s in the developed world.
First, we have the so-called Centre for Science in the Public Interest (CSPI). Helmed by its Executive Director, the infamous Michael Jacobson, and backed by an annual budget in excess of US$16 million, CSPI has launched disinformation campaigns against Malaysian Palm Oil. In fact, so disingenuous has been Jacobson’s claims that he has earned the rare distinction of being called various things in the media – ranging from the benign “Consumer Advocate” to the less flattering “Nutrition Terrorist”, “Terrorist”, “Food Cop”, “Killjoy”, “Food Fascist”, “Food Nazi” etc. In fact, the latter labels appear with such stunning regularity in the media that few men could have been so definitively defined.
Jacobson, to put it mildly, is guilty of utter disregard for the truth and scientific facts, frequently exaggerating figures and claims to advance CSPI’s own agenda
Having failed in a campaign in the eighties to portray palm oil as unhealthy, Jacobson and CSPI have been racking their collective brains as to how to discredit what is, inherently, healthy oil. Health claims or the converse, “un-healthy” claims, of course, have to be backed by rational science. However, these are matters that CSPI, despite their grandiose and associative-scientific sounding name, would have difficulty in delivering. Throwing figures and “facts” that would fail to pass muster for a secondary school science project, CSPI recklessly and with *** abandon, continues to launch fresh attacks, this time targeting the sustainability of oil palm cultivation. They argue, most deviously, that oil palm plantations have led to the destruction of rainforests and consequently, have deprived orang utans of their natural habitat. Interesting. Perhaps, even persuasive. If not, for the facts!
The superior sustainability of the Malaysian palm oil industry is patently obvious, and it is clear that the Malaysian oil palm cultivation is superior to any large scale agriculture in the tropics or the temperate countries in terms of sustainability parameters. The plantation industry is professionally managed, with many of them such as IOI Corporation, Golden Hope, PPB Group and KL Kepong, operating as listed corporations on the Malaysian stock market where corporate governance and corporate responsibility are well practiced more than farm activities in other parts of the world. The Palm Oil Truth Foundation (www.palmoiltruthfoundation.com) has sought to remedy the misconception that palm oil contributes to deforestation and enlighten the world of the fact that the Malaysian Palm Oil industry has always adopted sustainable cultivation best practices, including conservation and replanting. The MPOC, in fact has set up a US$5 Million Conservation Fund to assist in wild-life conservation.
But Jacobson understands the lembu phenomenon and knows that the herd instinct will take over. And sure enough, the NGO’s and other organizations have taken the bait and like the proverbial lembu, have predictably, blindly followed the herd.
First, the BBC sent a film crew to film the so–called deforestation and habitat loss of the Orang Utans. Then the NGO’s added their voices to the irrational chorus of calls for consumers to avoid palm oil products as they had allegedly come from unsustainable sources. The Friends of the Earth, a UK NGO alleges that “the palm oil industry is now considered by scientists as the biggest threat to the Orang Utan”! Scientists? Which scientists? The pseudo-scientists from the verbose sounding “Center for Science in the Public Interest”? It was almost hilarious to watch documentary after documentary warning of the dangers of palm oil because of the damage caused by the humble oil to Orang Utan habitats. Hilarious because nothing could be further from the truth, at least as far as Malaysia is concerned!
Comprehensive policies and laws on environmental protection are in place in Malaysia and are strictly enforced by the Department of Environment. Endangered species, including Orang Utans, needing protection are given priority with strong conservation programs put in place. Sabah, with a growing palm oil industry and one of the largest states in Malaysia had drafted a master list of protected areas based on the guidelines of the World Conservation Union (IUCN). In fact, 21.8% of Sabah is now protected, more than double the 10% recommended by the IUCN. It is also interesting to note that the Malaysian Palm oil industry is the prime mover for the Roundtable for Sustainable Palm Oil to encourage best practices and to minimize any adverse impact on the environment by the industry, long before the latest shenanigans initiated by CSPI started.
Almost all oil palm expansion in Malaysia is pursued through the conversion of existing rubber, cocoa and coconut plantations or from logged over forest areas which have been earmarked for agriculture. Moreover, out of the total land area of 30.2 million hectares, only 6 million hectares have been designated for agriculture under the Third Malaysia Agricultural Plan. Oil palm cultivation falls well within the area zoned for agriculture. Ironically, the area still under forest cover remains at well over 60 %, certainly much higher than that of the developed nations from which all this brouhaha over Orang Utan habitats are originating.
Recently, the European Free Alliance MEP’s together with an MEP grouping known as The Greens in the European Parliament (together, they form the 4th largest grouping in the European Parliament) lent their not inconsiderable voice to the issue. Lobbying the European Parliament’s “Industry, Technology, Research and Energy Committee”, which is tasked with proposing energy policies with an agreed EU target of 25% biomass renewables by 2020, this grouping managed to get the Energy committee to include, inter alia an amendment to “ban the use of palm oil for feeding our cars” due to the “lack of environmental standards and safeguards” leading to “an increase in tropical deforestation”, whilst “failing to reduce greenhouse gas emissions significantly”! Couching their proposal in euphemistic language, and this really takes the cake, the grouping went on to justify their proposal on the basis that the emergence of a European biofuels sector would offer opportunities for biofuel technology transfer to developing countries crippled by rising oil prices! It is this last statement that gives a clue as to the grouping’s real agenda and intentions. The proposal is designed to protect their turf, to protect the European biofuel sector! So much for all the WTO rules against protectionism.
It is about time that the world wakes up to such insidious and deceptive campaigns and that can only be achieved when the world develops the discernment to see through the veil and stop being lembus. That may be counter-intuitive but the herd instinct can only be overcome through education and clear branding and communication programs. Programs that will, ultimately, expose the lies and half-truths that appear to be the penchant and almost exclusive purview of CSPI and others of their ilk.
EMORY
By Frank Tate
Have you ever noticed that a herd of lembu or cows, all tend to move together in the same direction? Have you often wondered why this phenomenon occurs?
Imagine that you are taking a slow and leisurely drive along one of Malaysia’s lovely scenic country roads, away from the speeding juggernauts and cars on the North South highway. As you drive, you take in all the rolling fields of lalang, oil palm plantations stretching as far as the eye can see. Suddenly, something catches your attention. It’s a herd of lembu up ahead, in a nearby open field. Curiosity gets the better of you and you park off the road to investigate further. And there, you stand beside your car, in the middle of nowhere, watching the herd instinct in action.
For unexplained reasons, you scramble towards a low wooden fence and catch up to the lembu as the herd slowly makes its way across the field of lalang. Curious as to why they would all move in the same direction, you look towards the center of the herd and wonder aloud: “Why are all the lembu walking in this particular direction, as if on auto pilot?”
When I ask this question at all my seminars, the response I hear from delegates from all over the world is invariably the same: “They’re all moving in the same direction because everybody else is!”
People and organizations too are like this herd of lembu. They too are strongly influenced by the direction of the surrounding herd. Just take a look at the behavior of some NGO’s in the developed world.
First, we have the so-called Centre for Science in the Public Interest (CSPI). Helmed by its Executive Director, the infamous Michael Jacobson, and backed by an annual budget in excess of US$16 million, CSPI has launched disinformation campaigns against Malaysian Palm Oil. In fact, so disingenuous has been Jacobson’s claims that he has earned the rare distinction of being called various things in the media – ranging from the benign “Consumer Advocate” to the less flattering “Nutrition Terrorist”, “Terrorist”, “Food Cop”, “Killjoy”, “Food Fascist”, “Food Nazi” etc. In fact, the latter labels appear with such stunning regularity in the media that few men could have been so definitively defined.
Jacobson, to put it mildly, is guilty of utter disregard for the truth and scientific facts, frequently exaggerating figures and claims to advance CSPI’s own agenda
Having failed in a campaign in the eighties to portray palm oil as unhealthy, Jacobson and CSPI have been racking their collective brains as to how to discredit what is, inherently, healthy oil. Health claims or the converse, “un-healthy” claims, of course, have to be backed by rational science. However, these are matters that CSPI, despite their grandiose and associative-scientific sounding name, would have difficulty in delivering. Throwing figures and “facts” that would fail to pass muster for a secondary school science project, CSPI recklessly and with *** abandon, continues to launch fresh attacks, this time targeting the sustainability of oil palm cultivation. They argue, most deviously, that oil palm plantations have led to the destruction of rainforests and consequently, have deprived orang utans of their natural habitat. Interesting. Perhaps, even persuasive. If not, for the facts!
The superior sustainability of the Malaysian palm oil industry is patently obvious, and it is clear that the Malaysian oil palm cultivation is superior to any large scale agriculture in the tropics or the temperate countries in terms of sustainability parameters. The plantation industry is professionally managed, with many of them such as IOI Corporation, Golden Hope, PPB Group and KL Kepong, operating as listed corporations on the Malaysian stock market where corporate governance and corporate responsibility are well practiced more than farm activities in other parts of the world. The Palm Oil Truth Foundation (www.palmoiltruthfoundation.com) has sought to remedy the misconception that palm oil contributes to deforestation and enlighten the world of the fact that the Malaysian Palm Oil industry has always adopted sustainable cultivation best practices, including conservation and replanting. The MPOC, in fact has set up a US$5 Million Conservation Fund to assist in wild-life conservation.
But Jacobson understands the lembu phenomenon and knows that the herd instinct will take over. And sure enough, the NGO’s and other organizations have taken the bait and like the proverbial lembu, have predictably, blindly followed the herd.
First, the BBC sent a film crew to film the so–called deforestation and habitat loss of the Orang Utans. Then the NGO’s added their voices to the irrational chorus of calls for consumers to avoid palm oil products as they had allegedly come from unsustainable sources. The Friends of the Earth, a UK NGO alleges that “the palm oil industry is now considered by scientists as the biggest threat to the Orang Utan”! Scientists? Which scientists? The pseudo-scientists from the verbose sounding “Center for Science in the Public Interest”? It was almost hilarious to watch documentary after documentary warning of the dangers of palm oil because of the damage caused by the humble oil to Orang Utan habitats. Hilarious because nothing could be further from the truth, at least as far as Malaysia is concerned!
Comprehensive policies and laws on environmental protection are in place in Malaysia and are strictly enforced by the Department of Environment. Endangered species, including Orang Utans, needing protection are given priority with strong conservation programs put in place. Sabah, with a growing palm oil industry and one of the largest states in Malaysia had drafted a master list of protected areas based on the guidelines of the World Conservation Union (IUCN). In fact, 21.8% of Sabah is now protected, more than double the 10% recommended by the IUCN. It is also interesting to note that the Malaysian Palm oil industry is the prime mover for the Roundtable for Sustainable Palm Oil to encourage best practices and to minimize any adverse impact on the environment by the industry, long before the latest shenanigans initiated by CSPI started.
Almost all oil palm expansion in Malaysia is pursued through the conversion of existing rubber, cocoa and coconut plantations or from logged over forest areas which have been earmarked for agriculture. Moreover, out of the total land area of 30.2 million hectares, only 6 million hectares have been designated for agriculture under the Third Malaysia Agricultural Plan. Oil palm cultivation falls well within the area zoned for agriculture. Ironically, the area still under forest cover remains at well over 60 %, certainly much higher than that of the developed nations from which all this brouhaha over Orang Utan habitats are originating.
Recently, the European Free Alliance MEP’s together with an MEP grouping known as The Greens in the European Parliament (together, they form the 4th largest grouping in the European Parliament) lent their not inconsiderable voice to the issue. Lobbying the European Parliament’s “Industry, Technology, Research and Energy Committee”, which is tasked with proposing energy policies with an agreed EU target of 25% biomass renewables by 2020, this grouping managed to get the Energy committee to include, inter alia an amendment to “ban the use of palm oil for feeding our cars” due to the “lack of environmental standards and safeguards” leading to “an increase in tropical deforestation”, whilst “failing to reduce greenhouse gas emissions significantly”! Couching their proposal in euphemistic language, and this really takes the cake, the grouping went on to justify their proposal on the basis that the emergence of a European biofuels sector would offer opportunities for biofuel technology transfer to developing countries crippled by rising oil prices! It is this last statement that gives a clue as to the grouping’s real agenda and intentions. The proposal is designed to protect their turf, to protect the European biofuel sector! So much for all the WTO rules against protectionism.
It is about time that the world wakes up to such insidious and deceptive campaigns and that can only be achieved when the world develops the discernment to see through the veil and stop being lembus. That may be counter-intuitive but the herd instinct can only be overcome through education and clear branding and communication programs. Programs that will, ultimately, expose the lies and half-truths that appear to be the penchant and almost exclusive purview of CSPI and others of their ilk.
EMORY
Apr
03
Filed Under (Environment) by oil
Daniel Yergin asked:
Crude oil prices have risen to a historic $100 per barrel (West Texas Intermediate [WTI]), the culmination of a $25 price increase over several months, to reach a record that once seemed untouchable. Until now, the world has never experienced a triple-digit oil price. The all-time inflation-adjusted high was in April 1980, when, CERA calculates, crude oil hit $99.04 per barrel in terms of 2007 US dollars. The broader significance of a $90-$100 price range is that it highlights in dramatic fashion how different the oil market environment-and indeed the world economy-is today compared to the past two decades.
The jump in price from $75 at the beginning of September to $100 in early January 2008 highlights the dominant sentiment driving the oil market-that oil supply will be unable to keep pace with rising demand. However, if oil demand growth hits the brakes because of an economic slowdown or an easing of supply anxiety, we could see a steep fall in price.
Hundred dollar oil, give or take, is an exclamation point for two major trends: the rapid rise of Asia and the shift in economic power to exporting countries.
Today’s price levels bring us further into the range where the oil price can contribute to an economic slowdown. The effect on economic and oil demand growth depends on the duration of $90-$100 oil. Although this is overshadowed by news of the current record price, for 2007 the annual average for WTI was $72-not $100.
Historical assumptions about the dynamics of oil prices, demand, supply, and the global economy have given way to a new, but still unfolding, paradigm. This new paradigm is not without risks and dangers. The world economy can withstand the headwinds of very high oil prices much better than in the past, but prices of $90 to $100-plus push geopolitics and the economy deeper into uncharted territory.
The high prices of 1980 were at the beginning of the worst three-year period of economic growth of the past four decades. For the oil price to potentially play a similar role in a significant economic slowdown, prices would have to average from $100 to $120 per barrel for six months to a year.
THE MOVE INTO THE $100 NEIGHBORHOOD: HOW DID WE GET HERE?
The relentless march to the $90-$100 price range began in response to the growing market sentiment that supply will not be able to keep up with rising demand. Several factors have fostered this sentiment:
Growing shadow of fear over oil supply reliability. Rising heat in the cauldron of geopolitics is fueling anxiety about the future adequacy of oil supplies. For example, crude oil prices rose because of concern that violence in Nigeria, Africa’s largest oil producer, might cause additional output cuts. The oil markets have been closely following the potential for escalation in the Iranian nuclear issue. Some events with no direct effect on physical oil supplies have also contributed to the anxiety, resulting mainly in price spikes. The recent terrorist attacks in Algeria, the rise in tensions between the Turkish army and Kurdish movements in northern Iraq, and the current crisis in Pakistan, particularly following the assassination of former Prime Minister Benazir Bhutto, are all elements of the mix.
In each case, there are concerns that the situation may have spillover effects that could potentially threaten regional oil output. In reality, preliminary estimates indicate that for 2007 the annual average production of Iraq, one of the main contributors to the anxiety in oil markets in recent years, will be the highest since the start of the war in 2003.
Despite high oil prices, demand continues to rise. Global economic expansion and oil demand growth have, so far, proven remarkably resilient in the face of high prices, although there are now signs of some slowing. CERA projects world oil demand to increase 1.3 million barrels per day in 2008, with Asia and the Middle East accounting for 800,000 barrels per day (bd) of this growth.
In addition, CERA expects that constraints in the oil refining sector will underpin the transportation fuel markets for at least the next several years.
Oil inventory levels have steadily fallen for the seventh consecutive week. The latest data show that US crude oil inventories have fallen 18 percent from the peak of 354 million barrels in July to 290 million barrels in late December.
This also represents a decline of about 12 percent year on year for 2007. US distillate inventories (including highway diesel fuel and high-sulfur home heating oil) stand at 127 million barrels. This is 6 percent less than this time last year, but 5 percent higher than the recent five-year average.
Crude oil inventories held by industry in the countries of the Organization for Economic Cooperation and Development (OECD) were most recently assessed to be at the upper end of the normal range for this time of year, although they were below normal in Asia Pacific. OECD inventories including crude and products are in the middle of the normal range, supplying 54 days of forward demand cover.
Human resources and equipment constraints. Research for CERA’s Capital Costs Analysis Forum indicates that the costs for new upstream production have nearly doubled since 2000 and increased a full 80% just during the past three years. New refining project costs have increased by about 50% during the past three years. Shortages of skilled labor, equipment, and services have limited capacity expansions and are resulting in delays.
Growth rates of oil reserves and oil production have generally fallen short of expectations. The continued rise in costs and the personnel shortages are adding to the sentiment that supply will not be able to keep pace with demand.
IMPACT OF FINANCIAL MARKETS
The financial market-specifically the market for oil derivatives such as crude oil futures-has intensified the run-up in crude oil prices. The financial world did not unilaterally create the momentum toward $100, but it did react to growing perceptions about potential supply inadequacy and exacerbate the underlying oil price trend.
The number of New York Mercantile Exchange crude oil futures trading positions (open interest) reached an all-time high of around 1.5 million contracts (1,000 barrels each) last July and today remains close to that level. Combined open interest in oil futures and options averaged about 2.4 million contracts in 2007.
This represents a 37% increase compared with last year and continues the uptrend that has been in place since 2003.
Oil and the US Dollar
Oil prices have trended higher in recent years as perceived risks to supply have increased amid steady growth in demand. At the same time, the value of the US dollar has deteriorated relative to other currencies on concerns over the future of the US economy and the long-term sustainability of US fiscal and trade deficits.
This deterioration continues as sovereign wealth funds consider shifting their reserves from the US dollar to other currencies. The sharp decline in US housing prices, the spread of the credit crisis in 2007, and US Federal Reserve rate cuts have exacerbated these concerns.
The downside risks for many dollar-denominated assets (housing, US mortgage securities, financial-sector stocks, etc.) have jumped in recent months. Some portfolio managers are likely reallocating investment capital away from these assets in favor of others that are expected to appreciate in value, including many commodities. The ultimate result is that during the past few months, both trends (oil strength and dollar weakness) have intensified.
Global Shift in Income
An outcome of the steep rise in oil prices is a major shift in income. OPEC’s total revenues have risen from $199 billion in 2002 to almost $700 billion in 2007. As an oil and gas exporter, Russia has benefited enormously, too. Essentially bankrupt in 1998, it now holds $466 billion in reserves and approximately $180 billion in its stabilization fund.
With the shift in revenues around the world has come an evident shift in the international political balance and relative positions of nations. How these nations allocate their reserves and sovereign wealth funds will, in turn, be of central importance to the world economy, including the price of oil.
WHAT OIL PRICE IS TOO HIGH?
There is no single oil price that leads consumers and governments to alter behavior and policy. Differences in income levels, oil intensity of national economies, taxes, and subsidies mean that the reaction to a particular price is not uniform around the world.
Indeed, some economies of growing global significance are clear winners in a high oil price environment. The global economy is less oil intensive today than it was in the 1980s, and per capita income is higher relative to real gross domestic product (GDP). In 1980 the global economy consumed 0.89 barrels of crude oil, or spent nearly $68, to produce $1,000 of real GDP in 2007 US dollars.
Today the global economy needs about 0.63 barrels of crude oil to generate the same economic output. CERA estimates that the 2008 global average price of crude oil would need to be around $110 for the global economy to have similar exposure to the type of economic pain seen in 1980.
Although $100 crude oil rings the alarm bell of the global economy, prices on average have been much lower. The WTI average for 2007 was $72. The degree of economic effect from $100 depends on its duration.
A year of $100 or $110 oil would play a role in an economic slowdown, particularly in economies that depend on oil imports and that are relatively oil intensive. It would also be particularly problematic for developing countries that are not major beneficiaries of the global commodity boom.
A major difference between 2008 and 1980 is that today there are more growth engines for the global economy. A generation ago OECD countries were the key source of growth. Today, in addition to OECD economies, China, Russia, Middle Eastern countries, and other major oil exporters play a much bigger role in the global economy than in 1980.
A more diversified base of global economic growth provides more protection against a severe slowdown, but it does not inoculate the global economy. Particularly important will be how oil prices interact with other economic developments. Moreover, still to be tested is the degree to which Europe and the Asian economies are actually decoupled from the United States.
How Much Higher Could Prices Go?
With crude prices hitting $100, how much higher can they go? CERA’s Break Point scenario-one of our three long-term global scenarios to 2030-explores the impact of prices rising to as high as $150. The conclusion is that such prices not only would have a major economic impact, but also would stimulate much stronger policies among consuming countries and quicken the pace of innovation and diversification in the energy sector.
Part of the break point would be oil’s gradual loss-over many years-of its virtual monopoly in the transportation sector. Fuels other than conventional oil gain market share in the transportation market.
The other part of the break point is the way that high oil prices (and environmental worries) help bring economics, technology, and policy together to systematically reduce the “double intensity”-the carbon intensity of economic growth and the oil intensity of that growth. The combined effect of changes in consumer behavior, innovation, and government policy eventually leads to lower oil prices in this scenario.
ERIN
Crude oil prices have risen to a historic $100 per barrel (West Texas Intermediate [WTI]), the culmination of a $25 price increase over several months, to reach a record that once seemed untouchable. Until now, the world has never experienced a triple-digit oil price. The all-time inflation-adjusted high was in April 1980, when, CERA calculates, crude oil hit $99.04 per barrel in terms of 2007 US dollars. The broader significance of a $90-$100 price range is that it highlights in dramatic fashion how different the oil market environment-and indeed the world economy-is today compared to the past two decades.
The jump in price from $75 at the beginning of September to $100 in early January 2008 highlights the dominant sentiment driving the oil market-that oil supply will be unable to keep pace with rising demand. However, if oil demand growth hits the brakes because of an economic slowdown or an easing of supply anxiety, we could see a steep fall in price.
Hundred dollar oil, give or take, is an exclamation point for two major trends: the rapid rise of Asia and the shift in economic power to exporting countries.
Today’s price levels bring us further into the range where the oil price can contribute to an economic slowdown. The effect on economic and oil demand growth depends on the duration of $90-$100 oil. Although this is overshadowed by news of the current record price, for 2007 the annual average for WTI was $72-not $100.
Historical assumptions about the dynamics of oil prices, demand, supply, and the global economy have given way to a new, but still unfolding, paradigm. This new paradigm is not without risks and dangers. The world economy can withstand the headwinds of very high oil prices much better than in the past, but prices of $90 to $100-plus push geopolitics and the economy deeper into uncharted territory.
The high prices of 1980 were at the beginning of the worst three-year period of economic growth of the past four decades. For the oil price to potentially play a similar role in a significant economic slowdown, prices would have to average from $100 to $120 per barrel for six months to a year.
THE MOVE INTO THE $100 NEIGHBORHOOD: HOW DID WE GET HERE?
The relentless march to the $90-$100 price range began in response to the growing market sentiment that supply will not be able to keep up with rising demand. Several factors have fostered this sentiment:
Growing shadow of fear over oil supply reliability. Rising heat in the cauldron of geopolitics is fueling anxiety about the future adequacy of oil supplies. For example, crude oil prices rose because of concern that violence in Nigeria, Africa’s largest oil producer, might cause additional output cuts. The oil markets have been closely following the potential for escalation in the Iranian nuclear issue. Some events with no direct effect on physical oil supplies have also contributed to the anxiety, resulting mainly in price spikes. The recent terrorist attacks in Algeria, the rise in tensions between the Turkish army and Kurdish movements in northern Iraq, and the current crisis in Pakistan, particularly following the assassination of former Prime Minister Benazir Bhutto, are all elements of the mix.
In each case, there are concerns that the situation may have spillover effects that could potentially threaten regional oil output. In reality, preliminary estimates indicate that for 2007 the annual average production of Iraq, one of the main contributors to the anxiety in oil markets in recent years, will be the highest since the start of the war in 2003.
Despite high oil prices, demand continues to rise. Global economic expansion and oil demand growth have, so far, proven remarkably resilient in the face of high prices, although there are now signs of some slowing. CERA projects world oil demand to increase 1.3 million barrels per day in 2008, with Asia and the Middle East accounting for 800,000 barrels per day (bd) of this growth.
In addition, CERA expects that constraints in the oil refining sector will underpin the transportation fuel markets for at least the next several years.
Oil inventory levels have steadily fallen for the seventh consecutive week. The latest data show that US crude oil inventories have fallen 18 percent from the peak of 354 million barrels in July to 290 million barrels in late December.
This also represents a decline of about 12 percent year on year for 2007. US distillate inventories (including highway diesel fuel and high-sulfur home heating oil) stand at 127 million barrels. This is 6 percent less than this time last year, but 5 percent higher than the recent five-year average.
Crude oil inventories held by industry in the countries of the Organization for Economic Cooperation and Development (OECD) were most recently assessed to be at the upper end of the normal range for this time of year, although they were below normal in Asia Pacific. OECD inventories including crude and products are in the middle of the normal range, supplying 54 days of forward demand cover.
Human resources and equipment constraints. Research for CERA’s Capital Costs Analysis Forum indicates that the costs for new upstream production have nearly doubled since 2000 and increased a full 80% just during the past three years. New refining project costs have increased by about 50% during the past three years. Shortages of skilled labor, equipment, and services have limited capacity expansions and are resulting in delays.
Growth rates of oil reserves and oil production have generally fallen short of expectations. The continued rise in costs and the personnel shortages are adding to the sentiment that supply will not be able to keep pace with demand.
IMPACT OF FINANCIAL MARKETS
The financial market-specifically the market for oil derivatives such as crude oil futures-has intensified the run-up in crude oil prices. The financial world did not unilaterally create the momentum toward $100, but it did react to growing perceptions about potential supply inadequacy and exacerbate the underlying oil price trend.
The number of New York Mercantile Exchange crude oil futures trading positions (open interest) reached an all-time high of around 1.5 million contracts (1,000 barrels each) last July and today remains close to that level. Combined open interest in oil futures and options averaged about 2.4 million contracts in 2007.
This represents a 37% increase compared with last year and continues the uptrend that has been in place since 2003.
Oil and the US Dollar
Oil prices have trended higher in recent years as perceived risks to supply have increased amid steady growth in demand. At the same time, the value of the US dollar has deteriorated relative to other currencies on concerns over the future of the US economy and the long-term sustainability of US fiscal and trade deficits.
This deterioration continues as sovereign wealth funds consider shifting their reserves from the US dollar to other currencies. The sharp decline in US housing prices, the spread of the credit crisis in 2007, and US Federal Reserve rate cuts have exacerbated these concerns.
The downside risks for many dollar-denominated assets (housing, US mortgage securities, financial-sector stocks, etc.) have jumped in recent months. Some portfolio managers are likely reallocating investment capital away from these assets in favor of others that are expected to appreciate in value, including many commodities. The ultimate result is that during the past few months, both trends (oil strength and dollar weakness) have intensified.
Global Shift in Income
An outcome of the steep rise in oil prices is a major shift in income. OPEC’s total revenues have risen from $199 billion in 2002 to almost $700 billion in 2007. As an oil and gas exporter, Russia has benefited enormously, too. Essentially bankrupt in 1998, it now holds $466 billion in reserves and approximately $180 billion in its stabilization fund.
With the shift in revenues around the world has come an evident shift in the international political balance and relative positions of nations. How these nations allocate their reserves and sovereign wealth funds will, in turn, be of central importance to the world economy, including the price of oil.
WHAT OIL PRICE IS TOO HIGH?
There is no single oil price that leads consumers and governments to alter behavior and policy. Differences in income levels, oil intensity of national economies, taxes, and subsidies mean that the reaction to a particular price is not uniform around the world.
Indeed, some economies of growing global significance are clear winners in a high oil price environment. The global economy is less oil intensive today than it was in the 1980s, and per capita income is higher relative to real gross domestic product (GDP). In 1980 the global economy consumed 0.89 barrels of crude oil, or spent nearly $68, to produce $1,000 of real GDP in 2007 US dollars.
Today the global economy needs about 0.63 barrels of crude oil to generate the same economic output. CERA estimates that the 2008 global average price of crude oil would need to be around $110 for the global economy to have similar exposure to the type of economic pain seen in 1980.
Although $100 crude oil rings the alarm bell of the global economy, prices on average have been much lower. The WTI average for 2007 was $72. The degree of economic effect from $100 depends on its duration.
A year of $100 or $110 oil would play a role in an economic slowdown, particularly in economies that depend on oil imports and that are relatively oil intensive. It would also be particularly problematic for developing countries that are not major beneficiaries of the global commodity boom.
A major difference between 2008 and 1980 is that today there are more growth engines for the global economy. A generation ago OECD countries were the key source of growth. Today, in addition to OECD economies, China, Russia, Middle Eastern countries, and other major oil exporters play a much bigger role in the global economy than in 1980.
A more diversified base of global economic growth provides more protection against a severe slowdown, but it does not inoculate the global economy. Particularly important will be how oil prices interact with other economic developments. Moreover, still to be tested is the degree to which Europe and the Asian economies are actually decoupled from the United States.
How Much Higher Could Prices Go?
With crude prices hitting $100, how much higher can they go? CERA’s Break Point scenario-one of our three long-term global scenarios to 2030-explores the impact of prices rising to as high as $150. The conclusion is that such prices not only would have a major economic impact, but also would stimulate much stronger policies among consuming countries and quicken the pace of innovation and diversification in the energy sector.
Part of the break point would be oil’s gradual loss-over many years-of its virtual monopoly in the transportation sector. Fuels other than conventional oil gain market share in the transportation market.
The other part of the break point is the way that high oil prices (and environmental worries) help bring economics, technology, and policy together to systematically reduce the “double intensity”-the carbon intensity of economic growth and the oil intensity of that growth. The combined effect of changes in consumer behavior, innovation, and government policy eventually leads to lower oil prices in this scenario.
ERIN
