Volatility per barrel: Oil’s past, present and future
By IBISWorld energy analyst Justin Molavi
Over the past four years, the price of oil has experienced some of its most volatile fluctuations since the 1970s. These fluctuations present very difficult challenges toward economic recovery and lead to political uprising in nations across the world. The world recently experienced these problems when the price of oil skyrocketed above $147 per barrel in the midst of the global recession. Furthermore, the way that oil prices are tracking today, it may not be too long before we are back at these levels. What does this mean?
Economic rebound
From early 2007 to mid-2008, the price per barrel of crude oil skyrocketed from about $60 to a record high of $147. This growth occurred on the back of the rapid industrialization of China and India and a strong US economy, underpinned by easy credit and ever-growing housing prices. After peaking at $147, oil tumbled. Demand for “black gold” dropped in light of the severe global recession, and within about four months, oil fell from its record high and settled down to the mid $30s per barrel.
As the global financial crisis passed, economies across the world began to claw their way back into growth, causing the price of oil to begin a steady upward trend to $80 per barrel. Much of this growth can be explained by emerging economies that grew at accelerating rates despite the slow growth experienced by developed countries. These emerging economies continued to grow quickly off internal investments in infrastructure; in turn, they demanded oil at higher rates.
Overall, oil had a rather difficult time breaking through the $80 per barrel mark. However, political tensions in the Middle East and signs of a sustained global economic recovery ultimately pushed the price of oil out of this tight trading band and back toward $100 per barrel.
Middle East tensions
Oil prices have spiked dramatically following geopolitical tensions in the Middle East. Oil speculation has largely been behind the growth, since no major supply disruptions have occurred yet. Egypt’s perceived successful revolution has sparked uprisings in other neighboring countries and placed significant upward pressure on crude oil as investors worry about the tensions spreading. Speculators have been nervous that the unrest might spread into major oil producers such as Saudi Arabia. Furthermore, many nations in that region depend on the little oil they produce to support their economies. As a result, these trends have pushed oil from the mid $80s per barrel to above $100. Tensions will not likely lessen any time soon, with the international community stepping in to prevent tribal warfare and a humanitarian crisis in Libya. Other countries, such as Bahrain and Yemen, have also dealt with dissent, which will likely persist and place upward pressure on the price of oil.
High prices have necessitated intervention from the UN as prices have hovered around $100 for several weeks. All sectors of the US economy have felt the pinch with high oil prices hitting refiners and distributors and eventually flowing to gas stations.
Nonetheless, further intervention is expected from Western nations. They are interested in stability in the region and concerned about higher prices on global crude oil flowing to the gas its citizens are pumping.
The actual spread of tensions to large oil producing countries is unlikely. Nations like Saudi Arabia have populations that are relatively wealthy compared with their Egyptian and Tunisian counterparts. Other countries that have experienced significant tensions have made major concessions to quell the unrest due to what has unfolded in neighboring countries. However, this will not completely slow the upward movement in oil prices until the region is stabilized.
Where to now?
If oil continues to move upward on the back of geopolitical tensions, global economic growth may be compromised. The cost of producing most products will increase amid slow growth from developed economies. This factor will cause inflation concerns, eroding growth possibilities. In emerging economies, higher oil prices will slow down infrastructure growth as the price of sustaining construction rises substantially. In developed economies, a sharp rise in gasoline prices will eat up the disposable income gains made since the recession, and consumers will try and use less gasoline during a slow economic recovery. Eventually, this factor will lead to a search for alternatives, such as natural gas, to perform the same functions as refined products. Other solutions will also be on the table, including a shift toward hybrid vehicles and the construction of vehicles that run on natural gas or other crude oil byproducts. However, if Middle East tensions subside, and crude oil drops below the $100 threshold, a return to normalcy is largely expected. While there will likely be a push for alternative types of energy on the back of environmental awareness, these markets will need significant government support to properly compete against established fuels such as crude oil. The global economy would be safe from large threats to its growth, such as surging oil prices, and will resume solid recovery over the next five years. Nonetheless, given the volatility in crude oil, alternatives will be more closely examined since the threat of geopolitical issues will always concern the global economy. Whether governments step up to the plate remains to be seen.
Long-term oil outlook
Oil prices will rise over the five years to 2016, underpinned by sustained global growth and demand for crude oil from numerous markets, including vehicle transportation and energy for construction. Demand for oil is forecast to grow rapidly in developing countries, such as Africa and Asia, while they industrialize. Tensions in the Middle East will remain a concern over the next five years as the Egyptian revolution and other tensions have incited a movement in that region.
Additionally, as the global supply of oil drops, it is becoming more expensive to extract; therefore, the price of crude oil will experience upward pressure as supply winds down. All of these trends will support crude oil prices over the next five years, as they are set to grow at an annual rate of 3.2%.
About the Author
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