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.
it’s our government that is the kiss of death.
ebil speculators ping
nobama’s plan is working very well.
You’re not going to get $100 a barrel oil until you get a recovery. But as oil climbs, it will put a damper on economic growth. It’s ironic because the politicians who spent the last 20 years resisting drilling will now reap the whirlwind, as they say.
At the world level, this French analytical group sees no recovery either:
http://www.europe2020.org/spip.php?article636&lang=en
I can’t pretend to know what happened in the house of cards on Wall Street, but the high gas prices are what kicked everybody’s ass around here. People who were living paycheck to paycheck suddenly confronted with $500-600/month fuel bills just to get to work couldn’t make it. What’s the choice- you gotta get to work or you can’t pay anything.
Sounds like round two is coming.
You’re right- the government response has been to run in 180* the wrong direction. They should lower taxes. Eliminate regional formulation requirements. Expand drilling/exploration. Approve coal plants. Approve nuclear plants. Approve/incentivise bio-fuel ( it does make sense in some places)plants. Approve pipelines. And I’ll even go for reasonable incentives for wind, solar, compressed nat gas, etc. It would create a churn of employment and optimism that would actually stimulate this economy because America runs and thrives on energy.
Simple people can see this. Our government can’t.
If they get smacked down, we get smacked down with them.
There is NO FRICKIN’ recovery. How stupid does a person have to be to believe that the economy is actually recovering?
The media keeps repeating RECOVERY because the communists in the White House think Americans are stupid enough to believe there is a recovery occurring. Obama needs more time to do more damage before the real idiots figure out they've been had.
Who are the real idiots? Those are the ones who still have Obama bumper stickers on their cars.
Another manufactured crisis. We have more oil inder this nation than all the reserves in the middle east, but Obama is determined that we be placed into lille golf cart sized deathmobiles.
One real threat to drill baby drill and the oil will be back to $50, bucks.
I will take your word that there is no recovery. (And I am *not* being flippant when I say that.)
The whole recession has had a surreal air about it living where I do—Riley Co. Kansas—at the height of the recession, the least economically stressed county in the U.S. according to, I think it was the AP, and on a county-by-county maps of job losses and gains, over the past year the county with the biggest job *growth*.
There is no recovery... only a deeper and deeper depression.
LLS
Headline on Drudge: Unexpected Rise in US Jobless Claims
Exactly who did not expect this? Why do they have a job predicting anything if they can't predict the obvious!!
Relocating military units to Ft. Riley had everything to do with it. Gov $ as part of the force realignment. The crews in eastern Ks that are still working are driving 2 hrs to and back to your location since there’s no work here.
Sebelius pay back? KSU got the bio-terror lab.
Exactly!!
Drill the hole in the bottom of the boat bigger and bigger and tell me the water will drain out faster.
Clearly- It is and will continue to get WORSE!!
If Goebbels could see the state of the US state run media he would be green with envy...
There can be little doubt that the 08 oil rise was the pin that popped the housing bubble by pushing marginal borrowers over the edge.
Soros hand was all over it then, to create a crisis that would push for a political change. The next price rise will just continue the process until someone says stop. And, that stop sign needs to be “Drill here, drill now.”
http://www.usgs.gov/newsroom/article.asp?ID=1911 go to this link or Google “ND Oil” and then ask yourself WTF is going on?
“the high gas prices are what kicked everybody’s ass around here.”
Exactly right. Maybe no one in Manhattan drives (except the cabbies), but the rest of America was shut down by the $4 and higher gas prices at the pump.
I thought at the time the muslims don’t have to set off bombs to stop America, just control and raise the price of gasoline. Those prices slowed down businesses also, not just individuals.
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