The sharp jump in the oil price due to political upheaval in North Africa and the Middle East does not pose an immediate risk to ongoing world economic recovery.
The price of Brent crude oil has risen more than 21% since the start of this year and was trading just above $115/barrel on Friday.
This has led to fears of rapidly rising food prices and another global economic downturn as prices seem to be heading for 2008 levels, which contributed to the worldwide economic recession.
According to James Zhang, a commodity strategist at Standard Bank in London, most of the recent price rally has been due to the political unrest in countries in North Africa and the Middle East.
In a way one can argue that the increase is justified as the whole region produces more than 30% of global oil supply, Zhang says.
But apart from the political situation, the current market fundamentals differ a lot from those in 2008, when the oil price peaked at $145, he says.
"Firstly, the Organisation of the Petroleum Exporting Countries (Opec) has a much higher excess capacity (of oil) compared to 2008," he says.
"Globally, there are higher oil inventories. Thirdly, there is plenty of refining capacity as well. The oil price was driven so high in 2008 partly by "bottlenecks in refinery.''
Whereas price increases in 2008 were driven by demand, the recent spike in prices was supply driven, Zhang says.
Josina Oliphant, a commodities analyst at Rand Merchant Bank (RMB), says current oil prices will not have a big impact on the world economy.
"As long as the world's big economies, like the US, Britain and Europe, keep their interest rates low, the world economy should be in a good position to withstand the higher oil prices," she says.
She says that whereas risks to the world economy could increase if the price level stayed at about $120/barrel for some time, she does not expect the current high price levels to be sustained.
RMB this week published a revised average oil price forecast of a $100/barrel.
Although this is substantially higher than the bank's previous forecast of $92 for the year, Oliphant says the higher forecast is based mainly on stronger economic growth which boosted oil demand.
"The unrest in countries in the Middle East and North Africa will cause short-term spikes in price, but the price should slowly taper off to $100/barrel by the end of the year," she said.
Chris Hart, an economist at Investment Solutions, also says the price increases due to the political unrest are temporary. "If the oil price goes towards $140 or more, then we will see an actual impact (on the world economy)."
Fears about supply shortages and future further price increases have led to more speculation around the oil price.
But Christoph Frei, secretary-general of the World Energy Council, who visited SA this week, says Libya's share of the world oil market does not justify current oil prices.
The International Energy Agency said this week that 850000 to 1million of Libya's daily oil production of 1.65million barrels had been shut down due to the political turmoil.
The global daily oil production is 73million barrels, with Libya producing 2% of that.
Frei says the fact that oil is traded through financial instruments is an important factor in the price.
While hedging against price volatility is common, speculation for price jumps and profit is an unhealthy part of price volatility.
This kind of speculation "was also one of the root causes of the financial crisis and is important to monitor when it comes to oil price developments", he says.
But that still does not mean the unrest in the Middle East and North Africa can simply be ignored.
Duncan Clarke, CEO of Global Pacific & Partners, says that while 1million barrels may not sound like a lot, it represents 25% of the world's excess capacity of about 4million barrels a day. "That is a big shift," he says.
"The world is also highly sensitive through the global trading network to shifts in its security of supply and its expectations about forward supply.
"So this is a significant off-take of the market and it is not one that you can easily replace in 24 hours or a week.
"There has always been an inverse relationship between the degree of excess capacity and the upside potential in crude prices. When the reserve margin shrinks the prices go higher and get more volatile."
Clarke said the current high oil price position could be aggravated or ameliorated.
"If Opec producers increased quota on production supply, and if non-Opec production also increased, or if Libya calmed, then prices would start to go down," he says.
Will the world run out?
While supply problems have contributed to the rise in crude oil prices since the start of this year, questions on how long the world can keep on pumping more oil arose once more.
Geophysicist Marion King Hubbert coined the "peak oil theory" in the mid-1900s, claiming that oil production follows a bell-shaped curve.
That means because oil is a non-replenishing resource, there is a limit to how much the world can extract. "Peak oil" is the idea that one day oil production will reach a maximum and will start to decline until full depletion is ultimately reached.
But Duncan Clarke, CEO of Global Pacific & Partners, whose book The Battle for Barrels explores the subject, said the world is not running out of oil supply or reserves.
More discoveries are being made continually and more producers are entering the market, he said.
"In a general sense the model of peak oil is highly restrictive and parameterised," he said.
"The peak oil cult is a sort of lobby and also plays into the anti-hydro carbon initiatives we see around the world and all sorts of pseudo-green energy strategies and policies, part of which link back into climate change."
Clarke said the world will not reach peak oil until, if ever, it reaches peak technology.
"Technologies are a significant part of the changes enhancing oil recovery rates. The world oil field as a whole has a recovery rate of about 20% to 25%. Norway and some high- tech companies can recover 60% to 70%. So the additional part is a huge amount of reserves without making one more discovery. That is apart from the fact that there are huge pre-salt discoveries in Brazil and undiscovered oil in Russia and countries that are blocking entry of capital and investment, like Venezuela.
"Ever since the beginning of the oil industry over a century ago the next well has always been the new frontier, whether it has been from the onshore to the near shore, to the deep water, to the ultra deep. The industry is continuously pushing out the frontiers of exploration, capability and technology."
Petroleum made easy
The Organisation of Petroleum Exporting Countries (Opec) is an intergovernmental organisation of 12 oil producing countries. Opec produces 40% of the world's crude oil supply, but has 79.6% of the world's proven crude oil reserves. Opec controls the oil supply of its members, thereby influencing the price of crude oil.
Brent crude is the biggest of the major markers for crude oil and is sourced from the North Sea. It is used to price two-thirds of the world's traded crude oil supplies.
Source: www.businesslive.co.za
The price of Brent crude oil has risen more than 21% since the start of this year and was trading just above $115/barrel on Friday.
This has led to fears of rapidly rising food prices and another global economic downturn as prices seem to be heading for 2008 levels, which contributed to the worldwide economic recession.
According to James Zhang, a commodity strategist at Standard Bank in London, most of the recent price rally has been due to the political unrest in countries in North Africa and the Middle East.
In a way one can argue that the increase is justified as the whole region produces more than 30% of global oil supply, Zhang says.
But apart from the political situation, the current market fundamentals differ a lot from those in 2008, when the oil price peaked at $145, he says.
"Firstly, the Organisation of the Petroleum Exporting Countries (Opec) has a much higher excess capacity (of oil) compared to 2008," he says.
"Globally, there are higher oil inventories. Thirdly, there is plenty of refining capacity as well. The oil price was driven so high in 2008 partly by "bottlenecks in refinery.''
Whereas price increases in 2008 were driven by demand, the recent spike in prices was supply driven, Zhang says.
Josina Oliphant, a commodities analyst at Rand Merchant Bank (RMB), says current oil prices will not have a big impact on the world economy.
"As long as the world's big economies, like the US, Britain and Europe, keep their interest rates low, the world economy should be in a good position to withstand the higher oil prices," she says.
She says that whereas risks to the world economy could increase if the price level stayed at about $120/barrel for some time, she does not expect the current high price levels to be sustained.
RMB this week published a revised average oil price forecast of a $100/barrel.
Although this is substantially higher than the bank's previous forecast of $92 for the year, Oliphant says the higher forecast is based mainly on stronger economic growth which boosted oil demand.
"The unrest in countries in the Middle East and North Africa will cause short-term spikes in price, but the price should slowly taper off to $100/barrel by the end of the year," she said.
Chris Hart, an economist at Investment Solutions, also says the price increases due to the political unrest are temporary. "If the oil price goes towards $140 or more, then we will see an actual impact (on the world economy)."
Fears about supply shortages and future further price increases have led to more speculation around the oil price.
But Christoph Frei, secretary-general of the World Energy Council, who visited SA this week, says Libya's share of the world oil market does not justify current oil prices.
The International Energy Agency said this week that 850000 to 1million of Libya's daily oil production of 1.65million barrels had been shut down due to the political turmoil.
The global daily oil production is 73million barrels, with Libya producing 2% of that.
Frei says the fact that oil is traded through financial instruments is an important factor in the price.
While hedging against price volatility is common, speculation for price jumps and profit is an unhealthy part of price volatility.
This kind of speculation "was also one of the root causes of the financial crisis and is important to monitor when it comes to oil price developments", he says.
But that still does not mean the unrest in the Middle East and North Africa can simply be ignored.
Duncan Clarke, CEO of Global Pacific & Partners, says that while 1million barrels may not sound like a lot, it represents 25% of the world's excess capacity of about 4million barrels a day. "That is a big shift," he says.
"The world is also highly sensitive through the global trading network to shifts in its security of supply and its expectations about forward supply.
"So this is a significant off-take of the market and it is not one that you can easily replace in 24 hours or a week.
"There has always been an inverse relationship between the degree of excess capacity and the upside potential in crude prices. When the reserve margin shrinks the prices go higher and get more volatile."
Clarke said the current high oil price position could be aggravated or ameliorated.
"If Opec producers increased quota on production supply, and if non-Opec production also increased, or if Libya calmed, then prices would start to go down," he says.
Will the world run out?
While supply problems have contributed to the rise in crude oil prices since the start of this year, questions on how long the world can keep on pumping more oil arose once more.
Geophysicist Marion King Hubbert coined the "peak oil theory" in the mid-1900s, claiming that oil production follows a bell-shaped curve.
That means because oil is a non-replenishing resource, there is a limit to how much the world can extract. "Peak oil" is the idea that one day oil production will reach a maximum and will start to decline until full depletion is ultimately reached.
But Duncan Clarke, CEO of Global Pacific & Partners, whose book The Battle for Barrels explores the subject, said the world is not running out of oil supply or reserves.
More discoveries are being made continually and more producers are entering the market, he said.
"In a general sense the model of peak oil is highly restrictive and parameterised," he said.
"The peak oil cult is a sort of lobby and also plays into the anti-hydro carbon initiatives we see around the world and all sorts of pseudo-green energy strategies and policies, part of which link back into climate change."
Clarke said the world will not reach peak oil until, if ever, it reaches peak technology.
"Technologies are a significant part of the changes enhancing oil recovery rates. The world oil field as a whole has a recovery rate of about 20% to 25%. Norway and some high- tech companies can recover 60% to 70%. So the additional part is a huge amount of reserves without making one more discovery. That is apart from the fact that there are huge pre-salt discoveries in Brazil and undiscovered oil in Russia and countries that are blocking entry of capital and investment, like Venezuela.
"Ever since the beginning of the oil industry over a century ago the next well has always been the new frontier, whether it has been from the onshore to the near shore, to the deep water, to the ultra deep. The industry is continuously pushing out the frontiers of exploration, capability and technology."
Petroleum made easy
The Organisation of Petroleum Exporting Countries (Opec) is an intergovernmental organisation of 12 oil producing countries. Opec produces 40% of the world's crude oil supply, but has 79.6% of the world's proven crude oil reserves. Opec controls the oil supply of its members, thereby influencing the price of crude oil.
Brent crude is the biggest of the major markers for crude oil and is sourced from the North Sea. It is used to price two-thirds of the world's traded crude oil supplies.
Source: www.businesslive.co.za
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