Oil, in Euros, Touches 2008 Highs

Remarkably, the price of Brent crude, calculated in Euros, has recently touched the highs set in the summer of 2008. Then, too, the oil market was shadowed by the threat of an Israeli attack on Iran (carried out either singly or jointly with the United States). This time around, the upward pressure on prices has also been exacerbated by the sanctions bill passed by the US Congress in December 2011, putting strong pressure on other states (especially China, India, South Korea, and Japan) to reduce or cut off their oil imports from Iran, on pain of being disallowed from the US market. The effect of the sanctions remains unclear--with both China and India showing strong resistance, and Japan and South Korea hoping to get a waiver--but the markets are beginning to register a crisis atmosphere.

Though the price of West Texas Intermediate, in dollars, remains well below the extreme levels of 2008 ($110 vs $145), the dollar price of Brent (a more useful gauge for estimating import costs than WTIC) is $125 a barrel.

Some analysts insist that the price is responding to fundamental moves in supply and demand and discount the importance of the premium owing to war fears or the Iran embargo. Javier Blas of the Financial Times, "Fears for Crude Overtake Euro Crisis Woes," cites analysts who argue that the risk premium is just "a few dollars per barrel" and that the physical market is tight and getting tighter. Contributing to that are the following factors:

South Sudan has stopped pumping nearly 300,000 barrels a day of sought-after low-sulphur crude. Political unrest and strikes have removed about 250,000 b/d of supply from Yemen. Libya is pumping roughly 1m b/d, which is still well below the pre-civil war level of 1.6m b/d. Syrian output has dropped by about 150,000-200,000 b/d due to the turmoil there. . . .

Ageing infrastructure and oil fields are also contributing to higher prices. Crude oil output in the North Sea is falling and Venezuelan production is also sharply lower.

Demand in Asia has picked up in large part because Japanese power generators are turning to oil as an alternative to atomic power in the aftermath of last year’s tsunami and Fukushima nuclear disaster. Only two of Japan’s fleet of 54 reactors are operating, forcing the country to consume more fuel oil and crude for direct burning to generate electricity.

. . . Japan consumed a combined 635,000 b/d of crude and fuel oil for power generation last month, more than double the amount from a year ago.

The IEA, for its part, estimates that global oil consumption will grow by 830,000 b/d this year, more than the 740,000 b/d growth in 2011. “A two-speed outlook prevails,” the agency said on its latest monthly report, anticipating “robust oil demand growth” in emerging countries while consumption continues to fall across most developed nations.

Spikes in oil prices, in 2008, helped precipitate the Great Recession, and there are now ominous signs that we may experience a strong echo of that volatility this time around as well. Happy Election Year!