Geopol­i­tics fu­els oil price

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THE world is en­dur­ing a third ‘‘ oil shock’’ as crude prices trade at record high lev­els close to $US100 a bar­rel af­ter a sus­tained surge over the last three years, ac­cord­ing to economists. But un­like oil shocks of 1973 and 1980, this time the global econ­omy re­mains solid, even amid the added threat of the US hous­ing cri­sis.

‘‘ There is no doubt we are in the third oil price shock,’’ says Leo Drol­las, chief econ­o­mist at the Cen­tre for Global En­ergy Stud­ies in Lon­don. ‘‘ Be­cause since 2004 . . . prices have gone from $US30’’ to al­most $US100. Last month the price of oil struck an all-time peak of $US99.29 a bar­rel.

OPEC min­is­ters, meet­ing in Abu Dhabi to de­cide on out­put quo­tas for the car­tel, ar­gue that the cur­rent oil-price spike does not re­flect the sup­ply-de­mand sit­u­a­tion.

Rather, they be­lieve prices have surged be­cause of geopo­lit­i­cal con­cerns, such as over Iran’s nu­clear pro­gram.

In the run-up to the last oil shock in 1980, prices had more than dou­bled.

‘‘ The ma­jor­ity opin­ion is that the first two oil shocks were due to sup­ply fac­tors,’’ says Fran­cois Lescaroux, an econ­o­mist at IFP, a French state-run en­ergy re­search body. ‘‘ Ev­ery­one agrees this time that de­mand fac­tors are pulling up prices.’’ Strong de­mand is com­ing from China and In­dia, where the economies are grow­ing at break­neck speed.

The oil price shock of 1973 oc­curred af­ter Arab mem­bers of OPEC halted ship­ments of crude to the US, West­ern Europe and Ja­pan for per­ceived sup­port of Is­rael in its bat­tle against Syria and Egypt dur­ing the Yom Kip­pur War.

Fol­low­ing the oil em­bargo, the price of crude jumped above $US10 per bar­rel for the first time.

‘‘ The em­bargo af­firmed by OPEC trig­gered the spike in prices, as the cri­sis was viewed as a sup­ply shock,’’ Lescaroux says. ‘‘ But be­fore 1973, com­mod­ity prices had al­ready be­gun fly­ing higher be­cause of strong growth in coun­tries which were mem­bers of the OECD’’ group of in­dus­tri­alised na­tions. This led to higher de­mand for oil.

The sec­ond oil cri­sis, in 1979, came in the wake of the Ira­nian Revo­lu­tion. By the start of 1981, oil prices had surged to $US39, which ad­justed for in­fla­tion is the equiv­a­lent of crude reach­ing about $US101 per bar­rel in nom­i­nal terms to­day.

Mean­while, a com­mon fac­tor in all three oil shocks has been po­lit­i­cal un­rest.

‘‘ In all three cases geopol­i­tics played a role,’’ says Yahia Said, a pro­fes­sor at the Lon­don School of Eco­nomics. ‘‘ In the first case, it was the Yom Kip­pur War of 1973, in the sec­ond case it was the Iraqi in­va­sion of Iran (af­ter the Ira­nian Revo­lu­tion). In this case it is ten­sions around Iraq and Iran,’’ he says.

But re­gard­ing the eco­nomic fall­out, the latest oil shock is be­ing cush­ioned by coun­tries world­wide, Said says. ‘‘ The shock this time has not had the same neg­a­tive reper­cus­sions in terms of in­fla­tion or in terms of re­ces­sion. It means that the economies as the re­sult of the pre­vi­ous two shocks have man­aged to re­duce the im­pact of high oil prices, es­pe­cially in de­vel­oped coun­tries.’’ AFP

Pic­ture: Reuters

OPEC meets: Saudi Ara­bia’s oil min­is­ter Ali al-Naimi ar­rives at Emi­rates Palace in Abu Dhabi this week for the latest oil pro­duc­ers’ meet­ing

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