All over a barrel with price of oil

May 15 2008 by Peter Jackson, The Journal

AT THE time of writing, the price of oil has hit just short of US$127 a barrel, up from US$100 at the start of the year.

Forget the credit crunch, this is where the real danger to the world economy lies; oil not only fuels our cars, it powers the world’s industries.

The immediate cause of the latest hike is the Iranian government saying it is looking at a plan to cut crude output, but underlying and preceding that were the weak US dollar, in which oil is priced, and concerns over supplies.

Inevitably, it all boils down to supply and demand. According to an International Energy Agency report last year, global oil demand will average 87.8 million barrels a day this year, up from 85.7 million last year. By 2012, it is forecast that consumption will reach 95.8 million barrels a day.

There’s no mystery behind this. Even with threatened US recession, the global economy is growing at about 4.5% a year and that growth needs more oil. Much of this expansion is in the developing economies and, as they grow richer, so they buy energy-hungry goods, especially cars. In China alone, there are 14,000 more cars on the road every day, so little surprise that their oil demand is expected to rise 5% this year. Oil-producing Indonesia is importing more oil than it exports.

Worldwide oil demand is forecast to rise by 2.2% a year, while existing oil fields will produce between 3% and 4% less every year.

Given this, and given the political instability of so many oil-producing nations – nearly a third of the world’s oil is in Iraq, Kuwait and Saudi Arabia – it is no wonder that the US, the world’s largest consumer of oil, is feeling vulnerable.

And this sense of exposure is driving the oil price up even further with the Bush government buying about 70,000 barrels of oil a day to add to its emergency oil stockpile, which is currently large enough to keep the US economy running for just 56 days if imports were cut off.

Only six years ago, remember, it was considered alarmist to talk of it ever reaching the US$100 mark – now analysts are talking about US$200.

We’re all over a barrel.