World begins to smart as oil sets a scorching pace

Oil price is one of the factors that placed the US economy at the risk of recession

LONDON: From the poorest of Africa to the US and big business, a breakneck rally that could take oil to $200 a barrel is likely to inflict pain on everyone. The world was remarkably resilient to a series of record prices in 2007, but a roughly 30% rise since the end of last year, with predictions of more to come, is harder to absorb.

“The key issue is the rate of change. The recent exponential rise is unhealthy for everyone,” a senior executive from a major oil company said. He declined to be named. On the first trading day of 2008, oil prices hit the $100 a barrel level, which once seemed unimaginable.

The price topped $126 a barrel on Friday, making a rise to $150 probable and to $200 possible, according to Organisation of the Petroleum Exporting Countries (Opec) ministers and investment bankers alike. “If current conditions continue, reaching a period when oil is supplied at $200 a barrel is not out of reach,” Iran’s oil minister Gholamhossein Nozari said .

Investment bank Goldman Sachs said the possibility of $150-$200 a barrel over the next six-to-24 months was “increasingly likely”. The bank was one of the first to point to a triple-digit oil price more than two years ago.

Oil at $200 a barrel would mean roughly $6.50 a gallon for US gasoline, according to figures from Standard Life. It makes the record $3.61 US consumers are now paying seem cheap.

Already, the US consumer has begun to retrench. “I think we’ve reached the point now where we’re starting to see significant responses from consumers,” said Jim Hamilton, professor at the University of California in San Diego, adding oil prices were one of the factors that placed the US economy at the risk of recession.

For emerging economies, an ever bigger burden is financing subsidies their populations consider a birthright. Major consumer countries like India and China are spending billions of dollars to keep transport costs low, while some smaller players, such as Syria, have decided to stop paying up.

For all big business, including oil companies, soaring fuel costs can cut profits.
“The speed of adapting to high oil prices has been gathering pace, and will no doubt intensify if the oil price continues to rise,” said Richard Batty of Standard Life.

“However, higher oil prices on a multi-year view remain a hit to corporate margins.”
Among the first to suffer are airlines, some of which are facing bankruptcy because of higher fuel costs. The big oil companies have enjoyed record earnings, but they are paying a price.

“Exploration and production will benefit from higher prices and the stock market value of shares,” said a senior oil industry executive. “Refining profits will struggle because consumption will decrease and margins will be lower.”

This time they have been slower to bring on more oil and the Opec has  been cautious about increasing output. It has held its production targets steady since last year and resisted a plea from top consumer the US to raise output when it last met in March.

The group has repeatedly said supplies are adequate and that the market has been driven by speculation. According to that logic, adding more oil would not halt the rally, but others say it could send a powerful signal.   

This week, just before US President George Bush heads to the world’s biggest oil exporter Saudi Arabia, Opec felt the need to issue a statement reassuring the market again there was enough oil, but saying it would act if  necessary.

“The market needs something from Opec and raising supplies could ease the price,” an Opec insider said. The comment was the first in months to depart from the group’s line that the market’s momentum was a result of factors beyond its control.   

Opec countries are expected to earn more than a $1 trillion this year from oil exports, the US government has forecast, but  they too are wary of demand
destruction.

If prices continue to rise at the current rate, that possibility becomes more like a probability, with every $10 rise in oil knocking about 0.25% off gross domestic product in developed countries, according to analysts’ rule of thumb.

“It is not in Opec’s interest to be one of the causes of a major world economic slowdown,” Batty said.