Oil Price

2008 Oil Price Crisis

The Summer of 2008 has seen repeated oil price hikes, with the price of oil reaching record levels of $146 in July, before falling back. There has been repeated speculation as to what is causing the rise:

Supply Constraints

Fatih Birol, the chief economist of the International Energy Agency argues the oil industry has entered "a new energy world order" where it is harder to keep supply and demand in equilibrium. "When the price went up as a result of the Iranian revolution, demand went down," he added.

He continues: "But what has happened in the last few years has not been in line with economic theory. The price of oil went up sharply between 2004 and 2006 and demand actually increased. That may seem bizarre but it is the result of new buyers coming in, such as China and the Middle Eastern economies where fuel is subsidised by government and rises are not reflected on the consumer side."

The Madness of Men Causes $70 of Speculation

In June 2008, the CEO of global giant BP, Tony Hayward said: "We’re not running out of hydrocarbons," He blamed poor policy making or the “madness of men” for the shortfall, dismissing any notions of peak oil. “Political factors, barriers to entry and high taxes all play a role here. In other words, when it comes to producing more oil, the problems are above ground, not below it. They are not geological, but political.”

The following month, in July 2008, India's Finance Minister P Chidambaram blamed speculators for the increase in oil prices saying any price above USD 60 dollars per barrel was due of speculation.

However, just days later, the U.S. Commodity Futures Trading Commission, issued an interim report that concluded that speculators were not responsible for the soaring price of oil. It said its preliminary analysis was that it "does not support the proposition that speculative activity has systematically driven changes in oil prices."

The CFTC report noted that world economic activity has expanded at close to 5 per cent annually since 2004, "marking the strongest performance in two decades," but oil supplies have not kept pace with demand. "In the past three years, non-OPEC production growth has slowed to levels well below historical averages."

The Coming Oil Supply Crunch

Just as oil prices began to fall in August 2008 from their peak the month before, Chatham House, the influential British think-tank, issued a report that argued that because of inadequate investment by both international and national oil companies there will be a serious oil supply crunch within the next few years. This spike, which could see the price of oil spiral to over $200, could “have serious policy implications with long-lasting effects on the global energy picture.”

As the report notes: “Most conventional forecasts expect a very large increase in the production of liquid fuels. However, these forecasts simply assume this will be forthcoming.” The report argued that, although the oil may be there, “below-ground oil resources will not be converted into producing capacity”. The only event that will stop this happening is a collapse in the demand for oil and this is seen as unlikely.

The Chatham House report author, Paul Stevens, who is himself a consultant to the oil industry and governments, argued that more government intervention into the market may be the answer. “Governments must intervene to a much greater extent than they have so far been willing to do this Century.”

More Warnings of a Crunch

In February 2009, the International Energy Agency warning that, due to the economic downturn and reduced investment in oil, when the anticipated demand picked up in 2010 there may not be enough oil to go round.

Nobuo Tanaka, the IEA's executive director, said that he expected world oil demand to rise by about one million barrels per day in 2010 "Currently the demand is very low due to the very bad economic situation. He added: "But when the economy starts growing, recovery comes again in 2010 and then onward, we may have another serious supply crunch if capital investment is not coming."

The economic slowdown was also reducing investment in renewables. “Unfortunately we are seeing a deceleration occurring in the switch to renewables," Tanaka said. "I don't see much chance it (demand) could come back now, but if we do not invest in renewables now, it could bounce back when the economy starts to grow again," he said.

$50 a Barrel and Falling

Just as the record oil price of $147 in the Summer of 2008 had caused significant problems for consumers, in November 2008, the plummeting oil price was inflicting serious problems on producing nations who were losing vast amounts of money. OPEC admitted it had lost about $700bn because of falling crude prices, according to the oil cartel's president Chakib Khelil, Algeria"s Minister of Energy and Mines

As the oil price dipped below $50 a barrel, several economies were said to be heading towards crisis. Saudi Arabia, the world's leading oil producer and exporter, was expected to cut back on current spending and and development plans, but cautious fiscal policies mean the kingdom was in a better position than many OPEC countries to survive the downturn.

However, the second largest OPEC producer, Iran, receives 80% of its revenue comes from oil, so is especially vulnerable to reduced prices. Its "rainy day" oil stabilisation fund, used to release profits when revenues decline, was reported to be severely depleted. The IMF had calculated that for Iran to balance its budget, the price of crude oil must not fall below $95 a barrel.

Russia was said to be facing a $150bn shortfall in its spending plans due to lost revenue. Since May 2008, Russian markets had lost 70% of their value, and the country's central bank had spent $57.5bn trying to prop up the ailing currency. "If the trend continues, with the government supporting the rouble, oil prices falling and a slowing economy, we are going to have a major crisis," said Chris Weafer, of the Moscow brokerage Uralsib.

Venezuela relies on oil for half its exports and 95% of government revenue, leaving Chavez's political and economic and social ambitions vulnerable.

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