Business | Oil & Gas

Spiralling oil price threatens to choke global economic recovery

Crude price spikes as producers fail to cure output loss from unrest

  • By Himendra Mohan Kumar, Staff Reporter
  • Published: 00:00 April 4, 2011
  • Gulf News

Fuelling worries
  • Image Credit: Ahmed Ramzan/Gulf News
  • A Dubai petrol station. As political disturbances across the Middle East and North Africa continue to keep oil prices high experts fear the situation will affect nascent global recovery.

Abu Dhabi: Surging international oil prices amid growing unrest in the Middle East and North Africa region threaten to choke the nascent global economic recovery with experts fearing oil hovering over $120 (Dh440) a barrel over a sustained period may well become the tipping point to send several economies back into recession.

"Employment continues to be weak in the United States and in Europe. Rising commodity prices erode disposable income and that's a real threat to a recovery that looks fragile in much of the western world," HSBC economist Simon Williams told Gulf News by telephone.

Williams said consumers are already feeling the strain of high oil prices which, currently, are at two-and-a-half-year highs, with mounting supply concerns in the international market pushing the prices higher.

Saudi Arabia, the largest oil producer in the Organisation of Petroleum Exporting Countries (Opec) has thus far been unable to make up for the shortfall in oil supply from Libya, much of which has been shut off as a consequence of the popular uprising against Muammar Gaddafi.

Production affected

This month, striking oil workers in Gabon stopped the African country's estimated 240,000 barrels of daily crude oil production.

Many countries in the region including Yemen, Syria, Algeria, and Egypt are in turmoil, but the oil markets' real fear is civilian unrest spreading to Saudi Arabia.

Any shutdown at a Saudi oil producing facility, could well take oil prices past $150 a barrel in no time. "High oil prices and stagflation continue to worry producers as well as consumers, though the oil market is still bullish. However, the market is concerned about supply issues and I don't think the oil prices are going to fall dramatically from their current levels," said Kate Dourian, Middle East editor at Platts, a global energy information provider.

Lynchpin

Crude oil rose to a 30-month high in New York on April 1 as the US added more jobs than forecast, signalling increased demand, and as fighting intensified in Libya.

Oil for May delivery climbed 1.1 per cent to $107.94 a barrel on the New York Mercantile Exchange, the highest settlement since September 2008. Brent oil for May settlement climbed $1.34, or 1.1 per cent, to end the session at $118.70 a barrel on the London-based ICE Futures Europe exchange. It was the highest closing price since August 21, 2008.

"The high price of oil — over $4 a gallon was the lynchpin of the last recession in the US. The average price per gallon now is about $3.57 and it's my expectation that the prices may cross $4 a gallon by the end of May, the beginning of the driving season in the US, which, in turn, could cause a slowdown in the US economic growth," said Dalton Garis, Associate Professor of Economics and Petroleum Market Behaviour at Abu Dhabi's Petroleum Institute.

The US is world's largest importer of crude oil. Any slowdown in US economic growth affects oil consumption patterns and has a direct bearing on the international oil prices.

Gulf News
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