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PaulS's picture

Oil prices threaten global recovery

OK, here we go, 5th January and the IEA no less is warning that our precious economic recovery may not materialise after all, meaning Growth is over and there is no way to repay our enourmous debts.

I guess we must have hit that glass ceiling of total fossil fuel energy available to the World, which in turn has driven the oil price a bit higher. Now various companies will start buying forward in the hope of avoiding the astronomically high prices that speculators will drive the market towards. And all that will result in a repeat of 2008 and another recesion, which in turn will reduce energy requirements and allow energy prices to get back to more manageable levels.

Of course, this glass ceiling is of the sloping type: a few percentage points less each year. This means that even in no growth scenario, we would still hit it at some point and go through much the same recession, only a little later.

The only practical solution is to reduce world energy requirements by 50% or more and at the same time invest enough to supply all of that from renewables. But will the politicians get it before its too late?

Now lets see what the Guardian thinks:
Oil prices may threaten global economic recovery

As crude oil prices hit $95 a barrel, it is in a 'danger zone' which may derail recovery, says chief economist at Paris's IEA

The Guardian, Wednesday 5 January 2011

Analysts say that with crude oil will average $90 a barrel in 2011 (and they know, they got all the other predections wrong!), compared with $79.60 in 2010.

Oil prices are entering the "danger zone" and threaten to derail the fragile global economic recovery, according to Fatih Birol, chief economist at the International Energy Agency.

The Paris-based government policy adviser calculates that the oil import costs for the 34 countries that make up the Organisation for Economic Co-operation and Development (OECD) soared by $200bn over the past year to reach $790bn by the end of 2010.

"Oil prices are entering a dangerous zone for the global economy," Birol told the Financial Times. "The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers."

The price of Brent crude hit $95 a barrel for the first time in 27 months on Monday. Although oil prices have fallen recently, analyst Sanford Bernstein is predicting that crude oil will average $90 a barrel this year, compared with $79.60 in 2010. Roger Read, an analyst at Morgan Keegan & Co, is predicting the oil price will range between $75 and $120 this year.

Birol said: "It is not in the interest of anyone to see such high prices. Oil exporters need clients with healthy economies but these high prices will sooner or later make the economies sick, which would mean the need for importing oil will be less." Birol believes that in the short term oil producers should increase production to bring down prices.

Opec officials recently said that they had no plans to change oil quotas.

Oil consumption will increase by 1.3m barrels a day, or 1.5%, to a record 88.8m in 2011 (if that happens I'll eat my hat!), according to the IEA. Birol said oil consuming nations also need to play their part and reduce their reliance on oil.

The IEA calculates that the EU import bill rose by $70bn during 2010, equal to the combined budget deficits of Greece and Portugal. The IEA also says the ratio of countries' oil import bills to Gross Domestic Product, a key measure of the cost of oil prices on economies, is approaching levels last seen during the financial crisis in 2008. "It is a very telling story," said Birol. "2010 rang the first alarm bells and 2011 price levels could bring us to the same financial crisis times we saw in 2008." (and that is a very good point)

His warning comes just months after International Monetary Fund officials dismissed suggestions rising oil prices would hamper economic recovery. (and did they get anything right in 2008? of course not, economists have no idea because they do not take into account geological constraints on oil production, which cannot be replaced from any other source, regardless of how high the oil price gets. All that happens is demand destruction and life destruction in poorer parts of the world)