Peaking Global Oil Price Sparks Off Economic Slowdown
Though most would have expected it sooner, soaring global oil prices have finally started to trigger off an economic slowdown across borders.
It would be interesting to follow the relentless northward march of world oil price and its inherent ability to dampen upbeat markets and also restrain the purse for people in the poorer nations.
Since 2002, Benchmark New York crude oil futures have been registering increase at an accelerated rate, recording a 600 percent increase over the years, and have doubled from values that were predicted by experts as not sustainable.
There have been warnings the soaring oil prices would have a debilitating effect on the US, and then the world, economy. These concerns have been largely been proven unfounded since oil prices reached a record of $40 a barrel in 2005. But, unfortunately, things are not that bright now.
World oil price has recorded a 50 percent jump this year which, when viewed against the backdrop of global credit crisis and surging food prices, has provided ample reason to the International Monetary Fund to forecast a global recession with a probability rate of 25 percent (which it views as a growth rate below three percent for the years 2008 and 2009). Not unsurprisingly, the confidence level of consumers in Australia has taken a beating and dipped to an all-time low at this point in time when compared over the last 14 years.
Several reasons have had a contributory effect on the rising price of oil, and just when one of them had been resolved, raising hopes of stabilization in price, one or more of them assumed prominence.
Burgeoning global oil demand crossing all expectations, anxieties of cutbacks in production, fears that the war in the Middle East would hamper supply, a depreciating US dollar and also concerns that an ongoing global credit crisis would send more investors flocking to the energy sector to invest their funds have all been relevant factors that have fuelled the advancement of oil prices. And unfortunately, none of these factors are showing any signs of receding.
Recollections of the destruction perpetrated on the US oil industry by hurricanes such as Rita and Katrina in 2005, and the onset of the Atlantic hurricane season do not help either in the attempt to ward off fears of an oil crisis.
Experts had harbored hopes that once oil price touched the psychological level of $100 a barrel, consumers would see some reason in easing off demand, and one might expect a welcome drop. But the last six months have belied these expectations with oil prices refusing to fall much below $130 a barrel- even if there was a drop from $140 a barrel the previous month.
Interestingly, the developed economies have been affected more by the global credit crisis rather than oil prices, which act as a pointer to the altered nature of their economies as compared to the time when these prices last hit these levels.
The enhanced demand from economies in the Middle East as well as China has impacted in no small measure to the rising woes of those reeling under the impact of oil prices.
Notwithstanding concerns of a global economic downturn, the International Energy Agency (IEA), a watchdog for Organization for Economic Co-operation and Development (OECD) countries, forecasted a higher demand for oil in 2008 in its monthly report for July, which was the first time it has done so since predicting a subdued demand in its December report.
In contrast, however, Organization of the Petroleum Exporting Countries (OPEC) projected a lower demand for oil the same month. The differences in the viewpoints of both these bodies need, however, to be viewed against the backdrop of pressure created by the western countries on OPEC to hike production.
OPEC attributes high oil prices to speculative activities and is reluctant to boost output in order to push down oil prices. This thoroughly negates IEA’s viewpoint that higher prices are a result of increased demand and hence increased production is a necessary remedy.
While the developed nations have been protected against rising oil prices through a deft blend of economic growth, subsidies and fuel-efficiency, it seems the less endowed have to contend with a grim future with no viable solution in sight.
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