Posted on 04/08/2010 5:44:28 PM PDT by NormsRevenge
This week oil climbed to $87 a barrel, its highest level since October 2008 and prompted concerns that triple-digit crude was once again in the offing.
This was after a period of eight months when oil traded between $70 and $80, a narrow band that pleased oil producers without hurting consumers too much.
The latest surge seems to have been prompted by rising confidence in a global economic recovery, even if most traders and bankers are still cautious about supply and demand fundamentals.
Worries about the Greek economy have pegged prices back over the last couple of days but the more bullish Wall Street banks see prices climbing further, with Barclays Capital forecasting $97, Goldman Sachs $110 and Morgan Stanley $100 next year.
But the higher prices go, the deeper the concerns that they will stifle global growth. Jeff Rubin, a former CIBC chief economist and author of a book on oil and globalisation, says: “Triple-digit oil prices are going to threaten a world recovery.”
Pricier oil and other key commodities, notably iron ore and copper, could ripple through the economy and financial markets, potentially triggering inflation and forcing central banks to lift interest rates from ultra-low levels. This could force bond yields higher, but lower the attractions of equities.
However, higher oil prices could lift energy shares. In the S&P 500 index, the energy sector is up just 2.4 per cent this year and was barely positive in the first quarter, lagging behind the index’s 6 per cent gain for the year.
Nicholas Colas, ConvergEx Group chief market strategist, says: “With crude oil prices marching steadily higher, portfolio exposure to the energy sector could well become a key determinant of overall investment performance through the balance of 2010.”
Oil prices first hit $100 a barrel in January 2008, before continuing their rapid ascent to peak at $147 in July of that year. They fell to a low of $32 in December 2008, before recovering again. On Thursday oil traded at about $85 a barrel.
The latest rise comes as the economic recovery fuels a jump in oil demand after the first global decline in a quarter century. Supply is not a worry, as the Opec oil cartel has more than 6m b/d of capacity to spare in a pinch.
One difference from last year is that then the oil price was rising against the backdrop of a weaker dollar. This year crude and the dollar have risen together.
Policymakers seem untroubled. Energy ministers at the International Energy Forum in Mexico last week embraced less volatility, not lower prices. Lawrence Summers, director of the US National Economic Council, in remarks this week bemoaned his country’s dependence on foreign oil supplies, but did not complain about prices.
Some economists do not view $80 oil as a threat to global growth, which the International Monetary Fund projects at 4 per cent this year. James Hamilton, an economist at the University of California, San Diego, is author of a paper that found oil’s 2008 surge to $147 a barrel helped tip a housing-led slowdown into a recession. This time, the relatively steady nature of the price rebound has allowed consumers to adjust.
“The shock value is gone now,” Prof Hamilton says.
Hussein Allidina, commodity strategist at Morgan Stanley, says the $100 oil he predicts next year would increase the “oil burden” – a function of demand, prices and global output – to about 4 per cent from 2.8 per cent late last year. This would hurt developed economies more than emerging ones, as the latter are powering global growth and can afford fuel subsidies, he says. The IMF estimates consumer petroleum subsidies will reach almost $250bn this year.
“If we were to move to $100 a barrel, economic growth would start to slow, but ‘derail’ is likely too strong a word,” Mr Allidina says.
A move to higher oil prices would not necessarily generate corresponding gains in retail fuel prices, as new refining capacity has made petrol markets more competitive. In the US, filling stations in most states still sell petrol for less than $3 a gallon, well below the peak of 2008. In the UK, however, petrol prices are close to record highs, even though crude is well below its peak.
In any case, prices are as much an effect of the economic expansion as a threat to it. China, the fastest-growing economy, is alone expected to consume 520,000 b/d more this year than last, contributing a third of global demand growth, according to International Energy Agency estimates.
“You can’t have a global recovery without the oil price recovering as well,” says Lutz Kilian, a University of Michigan economist who has studied the effects of oil shocks. Because demand is fuelling prices, “the only way to keep oil prices down is to remain in a recession, which hardly sounds attractive”.
The prospect of higher prices is still alarming to many observers. Olivier Jakob, of Swiss consultant Petromatrix, said in a note that the “recovery of 2009 was fuelled with crude oil at $62 a barrel, not at $90 a barrel or $100 a barrel. We fear that the latest run on WTI will be the kiss of death for a global economy that was trying to avoid the possibility of a double-dip recession.”
When oil prices last surged to $100 a barrel in late 2007, US and other rich-country consumers blunted the impact by drawing on home-equity loans and credit cards to finance petrol purchases, says David Greely, energy economist at Goldman Sachs.
“It does raise the issue if we’re in a much more credit constrained world going forward, are consumers able to do that or will they be more sensitive?” he asks.
If this is what leadership was and still is, may as well pack the bags now and move to Canada or Mexico or who knows and beat the rush.
I’d like to personally thank another Norm for voting
No to drilling Anwr when he was the 60th vote for cloture to move a coherent energy bill to a final Senate vote. He did a real bang-up job digging into the Oil-for-Food scandal too..
I hope you’re enjoying your retirement and the headed even higher energy costs.
It’s all part of the plan to bring the United States of America to it’s knees.
Fight now, while you still can.
Yes. And there is something even more fundamental. In order for a recovery of any kind to occur, the GDP must rise. The GDP cannot rise unless MORE ENERGY is BURNED, CONSUMED. MORE ELECTRONS MUST FLOW, and BTU’s, oil, refined products and natural gas and fertilizers produced. None of the current adminstrations plans and programs anticipate any of the needs or requirements for a recovery. Instead, the EPA is moving ahead with a 17% reduction of energy consumption by the US by 2020, this guaranteeing NO RECOVERY for at least 10 years.
Higher energy costs are just overkill.
If inventories are up, this smells like a speculator’s bubble.
Gee, well, I hope voters would consider this as they cast ballots to elect more Rinos to the Senate and Congre$$.. but they won’t.
about all they’re good for is doorstops..
ROTFLMAO with melancholy.
Oil is not the enemy. The Obama administration will continue to keep our economy on the ropes.
What recovery?
It’s all fake. There is no demand. There is no recovery. He who holds the fake paper aka Wall St, the US gov’t, and the Fed Reserve are about to be SMACKED DOWN by the FREE MARKET. Bring back the guillotines!
The public is more interested in NCAA ball games. Every cable and sat TV bill divides the money up to each network. Sports programming is the most profitable and it keeps CNN, CBS, NBC, MSNBC, ABC/Disney and Fox/Saudia in control. The sheep traded their liberty for TV.
Leftists love high oil prices. It’s gets the masses out of their cars and into third world transportation alternatives.
Strange title to the story, since the story itself says most experts don’t believe $100 oil will give the “kiss of death” to the recovery!
and now you can watch TV on your pocket phone/camer/MP3/incendiary device. :-)
Isn’t technology marvelous?
It frees up people so they can really keep track of what matters most to them. crap.
Hey, quit reading the articles. :-)
I thought that the Dems told us that conservation would give us immediate relief from high gas prices?
Recovery!?!?!?!? What recovery?!?!?!?
Recovery?
Did I not get that memo?
What recovery?
Really? Is that why gold is also going up?
Gut your national currency and it takes more of it to buy real commodities. When you see real commodities going up, you should understand that your dollar is losing value.
Still, its not the end of the world. If we will do what is right there in front of us to do, which is to move toward energy independence. We have so much oil under the coastal shelf that it comes gurgling up through the ocean floor. We have as much oil shale in the intermountain west as the Saudis have oil. We send a half trillion dollars a year out of the country buying energy; spend it here, putting Americans to work, putting American companies to work, putting profits into the pockets of American investors and putting taxes and royalties into American treasuries and you will turn this economy around on a dime.
To sit with double digit inflation, and bankrupt city and state governments, homebuilders standing on street corners, carmakers hanging onto the government teat for dear life, when you have all that oil just sitting there for the taking is criminal stupidity.
Everything this government has planned is guaranteed not to reduce our use of OPEC oil by even a gallon. Everything they do will be guaranteed to protect OPEC while our most productive people are standing in the unemployment lines. The solution is simple, though. You just have to go over the top of the "deniers", the ones who won't let you drill, won't let you mine, won't let you refine, and won't let you dig. They'll be happy to punish you with a tax and sell you an offset, but buy your product from OPEC, thank you.
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