Continuous rise in oil prices will affect global economy: EIB study
Posted: 18 January 2006
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Global economic growth has proved resilient despite the significantly high oil prices for almost two years, but the global economy could be affected if the prices were to come close to $100 a barrel, according to a new study by the Emirates Industrial Bank.
 The EIB study pointed out that the recently produced IMF forecast for global GDP growth for 2005 is still a robust 4.3 per cent.
"One reason for the global economy's ability to absorb the high prices is that in real terms they are still below the all time peak. However, global economy could be affected if the prices were to come close to $ 100 a barrel, a scenario which cannot be ruled out in view of the limited capacity currently available, and a steadily growing demand," the study said.
Oil prices which started their climb in early 2004, have continued this climb unabated into 2005, raising medium to long term concerns about the impact on the global economy. Oil prices did ease in the fourth quarter indicating that the price spike in the third quarter to unprecedented high levels was an aberration caused because of the disruption caused by the hurricanes in USA.
Nevertheless, this seems to be a new era in oil prices, one where the oil price will hover around $50. This will have significant economic consequences for not only oil exporters and importers, but for the entire global economy, the study indicated.
As global oil demand steadily grows, a major concern is that production may not be able to keep pace with demand. The issue is not only one of crude oil production but also of refining capacity - as demonstrated by the disruption caused by the two hurricanes in USA. Currently, OPEC is producing at peak levels and may not be able to raise its capacity very soon. So unlike earlier when OPEC's restrictive practices led to higher prices, the situation is now so changed that OPEC is not able to influence prices anymore, at least not a significant way, the EIB study stated.
On oil prices, the study said that the decade long stability in oil prices seems to be destroyed and a shift in oil price levels seems to be there for a long time. Oil prices in September 2005 touched another high water mark ofS$ 70 per barrel, but this may have been an aberration. The year average is approx $ 54 which is almost the peak reached in 2004 ($ 55), it said.
"Nevertheless, it needs to be noted that these high prices are in real terms still lower than high level reached in 1981, which translates at today's prices into $ 80 per barrel. Compared to this, the high in 1985 (in 2005 prices) was $ 50 per barrel. Gas prices too rose in 2005 after the lost gas production capacity in the US because of the hurricanes.
On demand for oil the EIB stated: “While prices have risen, demand somewhat weakened in 2005. Higher price itself is a reason for the capping of demand.
Chinese and Asian demand has been weak this year. However, this weakening in demand is only temporary and medium to long term trend is clearly for rising demand."
Regarding supply, the study said: "Whatever production capacity was lost in the third quarter because of the American hurricanes was more or less recovered in the fourth quarter when production rose again by 1.3 million barrels per day (compared to a loss of 1.4 mbd in the third quarter).
The hurricanes also led to a loss of 8.8 billion cubic feet per day of natural gas, and a loss of approx. 3 mbd of refining capacity.
Loss of refining capacity is serious as it creates a bottleneck which has the same impact as production loss." On OPEC supply and capacity, the study said: " OPEC oil production contributes to only one third of the world demand. It is currently producing at peak levels. OPEC reports its production as 30.2 mbd which is a significantly higher than 2003 (the year of normal prices within $20-28 range) and 2004 (the year when prices started climbing).
Production is thus very close to sustainable capacity of 30.5 mbd," it added. (WAM)
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