Guardian UK: Over a Barrel (Impact of a recession on oil prices)

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Over a barrel
Speculation and high demand for oil have given us the $100 barrel. So will a recession drive the price down? Not necessarily
Paul Roberts

January 8, 2008 10:00 PM | Printable version

Predictably, oil's jump above the psychologically important $100 mark last week unleashed a fresh wave of gloomy prognostication.

Mainstream economists, already anxious over the global credit squeeze, fear pricy oil will make it even harder for America (and thus, Europe and even Asia) to recover from the subprime collapse. Those of a more apocalyptic mindset, meanwhile, go considerably further: $100 oil, they contend, offers still more proof that global oil output has "peaked," and that the number of barrels that oil companies like BP and oil countries like Saudi Arabia can squeeze from the ground will begin a swift and devastating decline.

The truth is bit more complex. Much of oil's dizzying rise (it was $25 as recently as 2002) has been driven by what analysts call "above ground" risks - that is, factors that have little to do with how much oil is left in the ground. Oil speculators, for example, have goosed the price well above what is justified by supply and demand. Fadel Gheit, a veteran oil analyst in New York, points out that, historically, oil prices have run roughly triple what it costs to physically extract the crude from the ground. With extraction costs now averaging $15 to $18 a barrel globally, Gheit reckons we're paying a "speculative premium" of as much as $57 a barrel. A weakening dollar is also to blame. Because oil is priced in greenbacks, the value of which has plummeted since 2001, surging crude prices at least partly reflect an ailing dollar. According to an analysis in the Wall Street Journal, if the dollar had instead remained as stable as gold since 2001, the price of oil would be just $39.

Lastly, demand for oil jumped far more swiftly than at any time in history - in large part because Asian economies are booming and Asian governments, desperate to keep the golden goose quacking, are subsidising oil consumption, thus muting pricing signals that would ordinarily curb demand. Such rapid increase in demand essentially caught the oil industry by surprise, and the big producers are now struggling to close the gap.

...(snip)...

Among policymakers, particularly those running for election, fear of a recession trumps fear of an oil peak, so there is even less incentive to talk about the potential of a peak in oil output. But if recession fails to "cure" high oil prices - and if the world finds itself in the double fix of an economic slowdown and expensive oil - even optimistic leaders may have to confront the possibility that speculators and a weak dollar are not alone in driving oil prices and that the real problems are indeed "below ground". .......(more)

The complete piece is at: http://commentisfree.guardian.co.uk/paul_roberts/2008/01/over_a_barrel2.html