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New Year Opens with Oil at an All-Time High
January 03, 2008 03:20 PM
by
findingDulcinea Staff
Oil prices reach $100 a barrel, raising questions about the sustainability of the economy and diminishing hydrocarbon supplies.
30-Second Summary
After months of hovering in the $90 price range, oil prices finally reached $100 per barrel on Jan. 2.
The violence in Nigeria and northern Iraq, important oil-producing regions, has played a part in this. So too has a report released by the Organization of Petroleum Exporting Countries (OPEC) saying that the 14-country bloc may not be able to meet global demand by 2024.
The immediate concern among economists and consumers is whether the cost of oil makes a recession in 2008 more likely.
Analysts such as David Wyss, chief economist for Standard & Poor’s, argue that energy is not a major concern for much of America. “So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices,” Wyss says.
Lester Lave, professor of economics at Carnegie Mellon University, says that in 1981 some 14–15 percent of U.S. gross domestic product was spent on energy. Now that figure stands at a mere 7 percent, rising oil costs are less of a danger to the American economy.
That said, the Dow Jones Industrial Index dropped 220.86 points on the day oil hit $100 a barrel.
Indeed, some are not at all sanguine about the medium-term outlook for the U.S. economy. Blogger SocraticGadfly wrote, “You can just write the word ‘recession’ in on your summer 2008 calendar.”
If the world’s oil supplies have, as some believe, reached their peak in production, oil prices are only going to rise as producers look to more expensive methods to procure harder-to-reach supplies. The fear that the world has arrived at that point was echoed by the latest OPEC report.
The violence in Nigeria and northern Iraq, important oil-producing regions, has played a part in this. So too has a report released by the Organization of Petroleum Exporting Countries (OPEC) saying that the 14-country bloc may not be able to meet global demand by 2024.
The immediate concern among economists and consumers is whether the cost of oil makes a recession in 2008 more likely.
Analysts such as David Wyss, chief economist for Standard & Poor’s, argue that energy is not a major concern for much of America. “So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices,” Wyss says.
Lester Lave, professor of economics at Carnegie Mellon University, says that in 1981 some 14–15 percent of U.S. gross domestic product was spent on energy. Now that figure stands at a mere 7 percent, rising oil costs are less of a danger to the American economy.
That said, the Dow Jones Industrial Index dropped 220.86 points on the day oil hit $100 a barrel.
Indeed, some are not at all sanguine about the medium-term outlook for the U.S. economy. Blogger SocraticGadfly wrote, “You can just write the word ‘recession’ in on your summer 2008 calendar.”
If the world’s oil supplies have, as some believe, reached their peak in production, oil prices are only going to rise as producers look to more expensive methods to procure harder-to-reach supplies. The fear that the world has arrived at that point was echoed by the latest OPEC report.
Headline Links: Oil hits $100 a barrel
The price of a barrel of light, sweet crude oil rose $4.02 to $100 during New York trading hours on Jan. 2. After months of prices hovering near the century mark, violence in Nigeria and Iraq, where Turkey raided PKK bases, stirred concerns about supplies. In addition, OPEC released a report that the trading bloc may fall short of its projected contribution to global oil supplies by 2024.
Source: ABC News
Background: Oil prices in 2007
On Nov. 7, the price of a barrel of oil rose to $98.02 during East Asian trading hours. Oil production forecasts showed U.S. reserves falling short for the third week in a row. International oil companies BP and ConocoPhillips evacuated workers and temporarily shut down operations as severe storms were expected around North Sea drilling facilities.
Source: MarketWatch
Key Players: OPEC
The Organization of Petroleum Exporting Countries was created in 1960 at the Baghdad Conference by Iraq, Iran, Kuwait, Saudi Arabia and Venezuela. Nine other countries joined later: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon and Angola. OPEC’s current headquarters are in Vienna. The group’s main goals are “to coordinate and unify petroleum policies, in order to secure fair and stable prices for petroleum producers; a regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.”
Source: OPEC
Opinion & Analysis: Oil price forecasts
No cause for alarm
David Wyss, chief economist for Standard & Poor’s, believes that while the initial shock of triple-digit oil prices did send the Dow Jones plummeting, the oil prices themselves do not signal instant recession. “So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices,” he said. Sluggish sales during the 2007 holiday season were partially result of increased energy costs, though analysts do not believe the United States will face the same sort of crisis that it did in the late 1970s and early 1980s. According to Lester Lave, professor of economics at Carnegie Mellon University, in 1981 some 14–15 percent of U.S. gross domestic product was spent on energy. Now, that figure is around 7 percent.
Source: San Francisco Chronicle
Alarm signals
The SocraticGadfly, whose name denotes a contrary disposition, writes on his blog that since the $100 “psychological barrier” has been broken, prices will skyrocket, putting the squeeze on American consumers. The SocraticGadfly writes, “You can just write the word ‘recession’ in on your summer 2008 calendar. Will political candidates be prepared?”
Source: SocraticGadfly
The International Energy Agency (IEA), a think tank affiliated with the Organization for Economic Cooperation and Development, said that China and India are on track to double their energy consumption by 2030. As a consequence, fossil fuel supplies will be used up more quickly and there will be an increase in greenhouse gas emissions. In 25 years, China and India’s oil imports will outpace those of the United States and Japan, according to IEA estimates.
Source: The Wall Street Journal (free registration required)
“All countries … need to act now to bring about a radical shift in investment in favor of cleaner, more efficient and more secure energy technologies,” says Nobuo Tanaka, head of the IEA. The agency expects that by 2030 fossil fuels will still provide 84 percent of the world’s energy needs, while demand will have increased enormously if India and China’s economies continue to grow as they have. Oilfields in the North Sea and the Gulf of Mexico are expected to dry up and oil shale deposits in Canada will meet only a tiny fraction of global supply, forcing many nations to rely increasingly on Middle Eastern reserves. Chuck Squatriglia, a blogger for Wired magazine, suggests that the U.S. economy could shift from oil to hydrogen within the next 10 years for “$100 billion—about what we spent in today’s dollar to put a man on the moon.”
Source: Wired
Richard Rainwater is a multibillionaire investor who subscribes to what has been termed the “imminent peak theory,” which posits that global oil resources will run out soon. “In 1988, there were 15 million barrels a day of shut-in production, and the world was using about 55 million barrels of oil. Today the world is using over 80 million, and there’s no shut-in production left,” he says. He is known for making claims such as “an economic tsunami is about to hit the global economy as the world runs out of oil.”
Source: CNN
Reference Material: Peak oil theory and fuel efficiency
Energy Bulletin, a Web site that styles itself as “a clearinghouse for current information regarding the peak in oil supply,” explains “peak oil” theory. Once reserves located near the surface have run out, drilling companies will have to turn to harder-to-reach sources, such as those under water or in tar sands. Getting to these reserves requires expensive technology, the cost of which would be passed on to the consumer. American geologist Marion King Hubbert theorized in the 1950s that oil production would follow a bell-shaped curve that has become known as the “Hubbert peak.” He forecast that global extraction would reach maximum capacity sometime in the late 1990s or early 2000s. When deepwater reserves and oil shale supplies are factored into the calculations, 2010 is estimated to be the year when the world will reach peak oil production.
Source: Energy Bulletin
The American Petroleum Institute has guides to oil prices and taxes as well as how to maximize fuel efficiency.
Source: American Petroleum Institute
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