Geopolitics fuels oil price
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
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