Crude crunch

Crude crunch

Ehtesham Shahid explains the effects of oil’s yo-yoing price on the world’s markets

January 27, 2009 1:03 by Ehtesham Shahid

As a not-so-frequent flier and the owner of a humble sedan, the fuss over oil prices bewilders me. When the oil price touched $147 a barrel on July 11, I was not alarmed. When it plummeted to below $40 on Dec. 18, I was not particularly elated. Either way, my budget hadn’t been shredded. However, I would prefer a scenario where the price of oil followed a simple Sunday flea market, instead of the futures or hedge-oriented acrobatics that do everything except establish its real value.

From this perspective, the events of recent weeks have seemed like theatrics. What began as an oil demand slump in the wake of slowing industrial activities across the world, led to the anticipation of a production cut by the Organization of Petroleum Exporting Countries (OPEC). On December 17, the 11-member cartel announced its deepest ever cut – 2.2 million barrels per day (bpd) – effective January 1, 2009. This was in addition to the existing curbs of 2 million bpd agreed by the group since September. Yet not much changed on the ground.

Irrespective of whether the oil price has bottomed out or not, it is now established that 2009 is unlikely to further the oil windfall that the Middle East has witnessed in the last few years. A combination of lower crude prices and production cuts means OPEC’s oil export revenue is set to slide more than 50 percent in 2009, to a five-year low.

December’s oil market forecast from the Center for Global Energy Studies (CGES) says the weakening economic outlook means that global oil demand will contract in 2009. “The CGES now expects the world as a whole to use around 0.5 mbpd less oil in 2009 than in 2008. Global demand is also estimated to have fallen this year, contracting by around 200,000 bpd,” it says.

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Tags: oil price, opec, US dollar, world markets