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SpOILer Again?

By Peter G. Hall, Vice-President and Chief Economist EDC

Oh no, not again! The US economy is showing strong vital signs, and along comes another run-up in oil prices. As in previous episodes, if recent price increases persist, they are significant enough to undermine US and global growth this year. What do we make of this latest spike?

Recent price mayhem began in 2007. At the tail end of the global economy's 16-year growth juggernaut, many swung over to the view that we were beginning to run out of black gold. 

Prices lurched from US $60 per barrel at the beginning of the year to US $90 by year-end. It didn’t stop there: triple digits showed up early in 2008, and by June WTI had soared to $147.50. Predictions of $200 oil by year-end were given substantial air time, but it was all for naught; recession clobbered prices, and Texas tea was selling for under $40 by February, 2009.

Crude quickly moved back to $75 per barrel and stayed there until rising economic momentum in late 2010 pushed the price into the mid-80's. The Arab Spring jolted monthly average WTI to $110 in April, and opened up a rare wedge between the Brent and WTI benchmarks that hasn't yet gone away. It's easy to forget, but prices retreated again, with WTI returning to the mid-$80 level by mid-2011.

Of these recent price movements, today's is actually the least dramatic. Concerns about the Iranian nuclear program and a possible military backlash, together with fears about the geopolitics of Syria's internal conflict sent crude prices again into the triple digits. WTI currently hovers just above the $100 zone, but it doesn't seem sure where to land.

Fearmongers are again capitalizing on developments, musing about short supplies, peak oil and the inevitable crunch when recovery finally comes. Are they right? World inventories have indeed dropped over the past year, raising the alarm. Oil in floating storage soared during the recession, but all that excess has now been soaked up. Oil in transit has also fallen, and land-based inventories have moved steadily downward over the past year. A sign of trouble? Hardly. The plunge in stockpiles is mostly in Europe, and began when conflict dried up Libyan crude. That is now largely back on the market, and inventories have stabilized at levels generally considered to be normal.

Perceived threats to production have also fuelled market jitters. To date, fears don’t line up with the data. In spite of worries about Iran and Syria, oil flows have hardly been compromised. Saudi Arabia increased supply to cover for Libya, and although three-quarters of Libyan oil is back onstream, Saudi oil is still riding high. Elsewhere, production is flat to rising, enabling world supply to move comfortably ahead of demand over the past four months.

Some analysts fret that if prices are this high now, true recovery will only move them higher. That view only works if one believes current prices are realistic. However, it’s hard to believe that the torrent of liquidity in today’s market isn’t fuelling speculation. If recovery sees the liquidity mopped up by central banks and redeployed by the private sector, oil prices could be in for a sobering decline.

The bottom line? Higher oil prices threaten world growth, but only if they persist. Basic demand and supply facts suggest that current prices are overblown. If the fear factor subsides, expect a correction.


The views expressed here are those of the author, and not necessarily of Export Development Canada. ©EDC

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