$100 oil as Libya splits and Saudi king returns with $11bn in gifts
Posted on 24 February 2011 with 2 comments from readers
Oil past the $100 mark in New York yesterday for the first time since the global financial crisis of 2008, and King Abdullah of Saudi Arabia returned from medical treatment abroad with $11 billion in housing and social security handouts for the poor.
But the eyes of the world are focused on the horrific violence in Libya with Muammar Qaddafi saying he will never surrender and digging in for a final battle with his mercenary forces. Paying foreign soldiers to shoot his own citizens has led to widespread desertions from his military and the eastern city of Benghazi has fallen.
Exodus of expats
Western countries are now engaged in a massive effort to get their nationals out of a fast deteriorating situation. Oil and gas exports are being shut down, and this impacts immediately on global energy prices. Libya produces 1.6 million barrels per day or 1.8 per cent of the global oil supply.
In Bahrain there is a process of negotiation going on after the violent repression of last week was followed by a far more conciliatory approach.
Yesterday’s return home by the still popular Saudi King Abdullah was accompanied by news of a $11 billion housing and social services package for the poor, also indicating a softer line on any potential dissent within the kingdom, although there has been little sign of it to date in the current crisis.
Potential further flash points seem more likely to be Algeria or Yemen. Nomura shocked markets with a prediction that oil prices could hit $220 a barrel if both Libyan and Algerian supplies are interrupted so there is no cause for complacency about oil staying at $100, it could well go much higher.
$220 oil?
How much higher in practice is hard to tell. The Nomura forecast is doubtless technically accurate but does not include the obvious caveat that oil will cease to be sold at higher prices and this will eventually put a cap on prices.
In July 2008 oil prices peaked at $147 with Gazprom predicting $250, and the Nomura forecast is similarly too high in the realms of improbability. But whether oil prices could reach that high again is uncertain. Some analysts reckon $120 is all it would take to send the world economy into a downward spin this time.
2 Comments posted by readers:
Unless Saudi Arabia goes south, I doubt oil will go much over $130. There is simply too much oil in storage right now. Growth in China seems to be slowing. Also, the new horizontal drilling has convinced many traders that peak oil is still way off. It isn’t, but oil is worth what people will pay for it.
Should oil get to anywhere near $200 a barrel this year, a worldwide depression would certainly occur within less than a year of it attaining that price. I would expect super stagflation with massive unemployment in the developed world.
The idea that we will run out of oil is nonsense, its price reflects the strength of the economy and the suppl/demand function. Clearly, the volume of fiat money is the commodity that may “run out”. The US$ and Euro should define an acceptable ‘numeraire’ as a condition to avoid a global recession.