High oil price is a threat to the world economy
Oct 23, 2009
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US oil futures edged over $80 a barrel early this week, marking a 12-month high, before retreating as the dollar sold off. Having fluctuated between $65 and $75 for a few months, oil has now broken free of this range, gaining 10% in the past three weeks.
What the commentators said
As far as the fundamentals are concerned, there's no reason for oil to be shooting up. "Demand in the developed world is still sluggish while what we see in China is impressive. Overall demand is a bit better than last year but that's faint praise," said Bill O'Grady of Confluence Investment Management. "There's still a lot of oil out there."
So much, in fact, that there are 125 million barrels of oil being stored on ships waiting to come to market, as Abdallah Saleem el-Badri of Opec noted: "When we see that floating storage eliminated it means demand is coming."
Indeed, this rally is "really about risk appetite", said Jonathan Kornafel of Hudson Capital Energy. Interest rates are near zero so the wave of liquidity created by loose global monetary policy is seeking out a return in riskier assets. "If the liquidity keeps flowing, one result is likely to be triple-digit oil," said Edward Hadas and Una Galani on Breakingviews.com.
That's bad news, as oil is already almost "too expensive" for the world to cope with. The developed world's economies are "too fragile" to deal with $100-a-barrel prices, agreed Jeremy Warner on Telegraph.co.uk. If it happens, "a double-dip recession in advanced economies would seem a virtual certainty".
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