On February 24, the benchmark price of a barrel of Brent oil reached US$119.79 -- the highest level since 2008 -- as a result of growing concerns that uprisings in Libya could lead to similar troubles in other major crude oil producing countries in the Near East, such as Saudi Arabia. As recently as last September, Brent crude was selling for only $80 a barrel.
"Generally speaking, we still don't know what the impact of rising oil prices will be," says Federico Steinberg, chief researcher of economics and international trade at the Real Instituto Elcano, and professor of economic analysis at the Autonomous University of Madrid. "We'll have to wait to see if there are any 'second round' effects -- that is to say, if companies suffer from rising production costs as a result of the rising price of crude, and then increase the prices of the products they provide to consumers." If this were to occur, he notes, "workers would demand salary increases, and we would enter an inflationary spiral."
An Uneasy Market
The extreme uneasiness in the oil market began with the outbreak of the social revolt in Tunisia that overturned the Ben Ali regime. On that day, Brent was selling for US$95 a barrel. The wave of protests spread to Egypt and then into Libya. It was the revolution in Libya that did the most to push up the price of crude, because of fears that petroleum production would be entirely shut off as a result. Libya produced 1.57 million barrels per day in January, according to the Organization for Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) -- a figure that represented 1.8% of the world's total production that month.
The real fear in the market is that the protests will also spread to Saudi Arabia, the world's largest petroleum producer, which pumped 8.34 million barrels per day in January. "Discounting an interruption of supply from Libya is one thing, but it is something very different if the revolt expands into Saudi Arabia, which has 20% of the world's petroleum output," David Rosenberg, strategist at Gluskin Sheff, told Bloomberg News on February 24.
West Texas oil futures, the reference price for petroleum in the United States, reached US$105.17 a barrel on March 4, the highest price since September 2008. In September 2010, the price was only $73.
"Oil prices above $100 a barrel are bad news for the economic recovery of the member-nations of the OECD (Organization for Economic Cooperation and Development), as the IEA has already said," notes Mariano Marzo Carpio, professor of energy resources in the geology department of the University of Barcelona. "High fuel prices mean more inflation and lower purchasing power for consumers." He adds: "All of that will be combated by raising interest rates, which will mean more expensive money for companies, which may suffer by being able to invest less -- and the higher cost of money will have a [negative] impact on consumer loans. We find ourselves in a situation where there are prospects for higher inflation and lower economic growth, the worst possible situation that economies can face."
According to Rafael Pampillón, professor of economics and country analysis at the IE Business School, "Clearly, the rising price of oil does nothing good for the global economy." On the contrary, he notes, "it has a negative impact on every economy of the world, as we've seen from the fact that the European Central Bank has already warned that it could raise interest rates at its meeting in April. This is a threat that we had foreseen for November."
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