It was inevitable that as Libya looked to be degenerating into civil war, the price of oil would climb and climb. Already we have had headline-grabbing predictions from Nomura analysts of the possibility of oil costing $220 per barrel. The reality, though far less dramatic, is still deeply worrying, with “sweet” oil flirting with $120 per barrel on Thursday 24 February (a high of $119.68), a price uncomfortably close to the pre-crash record highs of $140 per barrel last seen two and a half years ago.
Most of the concern involves scenarios where the unrest in North Africa spreads to Saudi Arabia, and it is no coincidence that King Abdullah of Saudi Arabia has just announced a support package worth some $36 billion aimed at keeping the kingdom’s citizens on-side, and discouraging any Tunisian style “Jasmine Revolutions” on his watch. According to the FT, the measures include a 15% wage hike for public sector workers and largesse for the unemployed and students, the latter two groups being at the forefront of the demonstrations that toppled the rulers of Tunisia and Egypt. Both groups have also had a prominent role in the attempted and, at the time of writing, incomplete ouster of Libya’s Colonel Muammer Gadaffi.
For its part Saudi Arabia and OPEC have made it clear that the present scare that is driving oil prices higher and higher is not based on any market shortage as yet. If there were to be shortages, as might happen if Libyan oil installations were damaged in protracted fighting or set ablaze in a last lunatic action as Gadaffi is reported to have threatened, then OPEC would simply increase production, the Saudis say.
Nevertheless, it seems likely that prices north of $110 a barrel could be with us for some time, and that poses a serious threat to global growth. Commodities Now picks up on the point that oil companies are currently scrambling to pull their personnel out of remote desert oil installations. It quotes the energy consultancy PFC which notes that a “sustained lack of security” for foreign oil workers will keep foreign oil companies out of Libya for some time to come.
The fact that most of the oil in Libya is land based makes the installations much easier for armed bands to get at. Commodities Now cites the Eurasia Group analysts’s comment that: “It is likely that the country will experience a prolonged period of violent instability, with a potential for full blown civil war” – with obvious implications for Libyan oil exporting capacity. Libya has Africa’s largest proven reserves, estimated at 44 billion barrels and generally accounts for around two percent of world output.
More worryingly, Commodities Now points out that Libya accounts for a disproportionately large slice of the oil imports of countries such as Italy and Ireland, so the impact on Eurozone recovery prospects, particularly on countries already up to their ears in debt problems, will not be pleasant.
The International Energy Agency’s chief economist, Fatih Birol has warned that western governments should be aware that rising oil prices, and the associated pressures on inflation, could force central banks to put up interest rates faster than the lacklustre economic recovery in many western economies could stand. Anything in excess of $90 per barrel oil has very worrying implications for the fragile recovery in many economies, he warned. Much of what we are seeing is market twitchiness. When Gaddafi appeared on Libyan TV to deliver his rambling impression of a man who had completely lost touch with reality, shouting that he would “die a martyr”, stock market dealers around the world went into fits. The Dow nosedived 178 points, losing 1.4%, while the S&P crashed 2.1%.
All of which goes to show what utter nonsense the French President Nicolas Sarkozy was spouting at the World Economic Forum, at Davos, when he used his keynote speech to recommend that governments get together to set world commodity prices. Prices that do not reflect market pressures create huge distortions that ultimately do far more harm than the supposed good that price fixing is supposed to achieve. If oil prices rocket to unsustainable levels, that creates huge incentives to boost the search for alternative energy sources – a better outcome, surely, than trying to keep the price of oil at some guestimated artificial “natural” level. I don’t want to even think about the tremendous perverse incentives that would follow from an attempt to set up some centralised global “Ministry of Prices” bureau, à la the French President’s suggestion. Definitely not a road to go down...
Further information on high oil prices, commodities and inflation:
- Commodities set to shine in 2011, by Anthony Harrington (blog)
- To Hedge or Not to Hedge, by Steve Robinson
- The Globalization of Inflation, by Diana Choyleva
- Sarkozy’s war on commodity speculators – is intervention the way to go? By Anthony Harrington (blog)
Tags: Gadaffi , Gulf States , King Abdullah , Libya , oil prices , OPEC , Sarkozy , Saudi Arabia