Mon, Dec 06, 2004 - Page 9 News List

The age of cheap oil is over, and price volatility is here to stay

By Larry Elliot  /  THE GUARDIAN , PARIS

Put away the stack-heeled shoes and the Slade records. Higher oil prices may have rekindled memories of glam rock and loon pants, but the west is not about to return to the days of sky-high inflation that marked the 1970s.

That was the good news Nov. 30 from the west's premier economic thinktank. From its headquarters in Paris, the Organisation for Economic Cooperation and Development (IECD) delivered a cautiously optimistic assessment of the chances of the global economy avoiding a fresh lurch into recession. Yes, it says, a higher oil price is putting the brakes on growth. Yes, it admits, the fall in the dollar could cause problems for certain parts of the world -- especially Europe -- but it is nowhere near as gloomy about the outlook as some of the Cassandras of the City and Wall Street.

Now for the bad news. It may be wildly premature to talk of recession, or even the real nightmare from the 1970s -- stagflation -- but high oil prices are here to stay, although the OECD believes it is unlikely stay at last night's high of nearly US$50 a barrel in New York. With global demand expected to remain strong, it thinks prices will be at US$35 a barrel by 2030 compared with US$27 in 2003. What's more, the world is going to become increasingly reliant on the turbulent Middle East for its supplies.

More reliant

And if the thinktank is even slightly out in its crystal ball gazing, by 2030 the price may be at least US$20 a barrel higher.

Notwithstanding more efficient use of oil in production, it is likely to retain its importance as a fuel in the longer term, increasingly for transport. Developing countries tend to have more energy-intensive economies, so rapid growth there could mean even stronger global demand for oil, perhaps adding US$20 a barrel to the OECD's baseline forecast for crude in 2030.

The problem, as the OECD sees it, is simple. As more and more countries seek to become richer, they consume more oil, and the poorer they are to start with, the more energy-intensive their growth tends to be. Rising demand acts as a signal to producers to increase supply, and fresh reserves will be discovered and exploited. Even so, demand will outstrip supply and so the price will go up. Moreover, the concentration of reserves in unstable parts of the world is a headache for the west.

"While global oil reserves are probably relatively ample, their distribution is likely to be increasingly concentrated on the Middle East members of OPEC, which already account for around two-thirds of global proved reserves," the OECD said.

In the short term, it added, there were real problems in producers increasing supply to meet the needs of oil-hungry countries such as the United States and China.

"Price volatility, compounded by geo-political tensions, raises uncertainty about underlying price trends and may depress oil production. OPEC's excess capacity is the lowest in three decades, providing little cushion to raise supply in the event of unexpected market disruptions."

Price volatility

One recent problem has been a shortage of tankers to transport crude, creating a bottleneck. It is concerned, too, that the message from the markets suggests that the days of an oil price below 20 dollars a barrel are over for good. "It is not clear how rapidly short-term factors boosting the oil price will endure, hampering the return to long-term equilibrium prices. However, some stickiness seems to be indicated by the far futures prices, which have risen to historical highs."

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