Imagining $100-a-barrel oil this winter or hoping for less?

18 August 2006
It says something about the times that Standard & Poor's (S&P) published a report earlier this month that considered the impact of oil prices rising to $240 a barrel in 2007. The credit ratings agency says this would be the consequence of the closure of the Strait of Hormuz in an extreme regional crisis. You don't have to be an economics professor to conclude that the global effect would be bad.

This is the most radical of four scenarios projected by S&P chief economist David Wyss. The others foresee the price of West Texas Intermediate (WTI) averaging $66-96 a barrel in 2007. In 2008, the possible range, excluding the Strait's closure scenario, is $62-78 a barrel.

Other forecasters are pitching in with higher oil price projections. The Energy Information Administration (EIA), the statistical agency

of the US Department of Energy, forecasts

that WTI will average more than $69 a barrel

in 2007.

But a growing number are projecting higher figures. Mamdouh Salameh, a World Bank

economic consultant, says oil will head towards $80 a barrel by year-end and to $90 in 2007. Jim Rogers, who started the Quantum Hedge Fund with George Soros, says that $100 a barrel is possible by the turn of the year. Consultant Matthew Simmons, author of a book about a possible Saudi Arabian oil production crash, has come to the same conclusion.

The predictions are in spite of evidence of growing production. The EIA says that non-OPEC oil output will rise by 600,000 b/d in 2006 and by up to 1.6 million b/d in 2007. Its diagnosis is that seven factors are at work: strong demand growth; lower-than-expected non-OPEC supply in the recent past; limited spare production capacity; geopolitical factors

including the Hezbollah war; refining

bottlenecks; bad weather in the Gulf of Mexico; and increasing speculation in oil futures.

The variety of issues explains the variation in short-term price forecasts. Some economists believe that only supply disruptions will cause $100 oil. Others conclude existing conditions will be sufficient to make it happen this winter.

There is consensus that record prices are doing less damage to the world economy than the experts previously expected. Wyss forecasts the US economy will continue growing by at least 2.5 per cent in real terms with WTI above $61 a barrel.

It is in no one's interests to have prices anywhere near $100 a barrel for more than a short period. But the world seems to be digesting $60 a barrel. The Eurozone recorded its fastest growth rate in six years in the second quarter of 2006. Oil at what was once seen as intolerable levels is the new norm. For Middle East oil exporters, the prognosis could hardly be better.

Better late than never

UN Security Council resolution 1701 has been criticised in Israel and Lebanon. The

resolution is vague and there are fears the

ceasefire will not hold. It was almost a month

and hundreds of lives too late. But it is better than nothing.

Three and a half years after the US and its coalition partners decided the UN had no role

in Iraq, it is back in business with Washington's support in Lebanon. Despite the doubts, tens

of thousands of refugees were joyfully returning to their homes in the south at the time of


Israeli Prime Minister Ehud Olmert and his government are being subjected to a storm of domestic criticism for accepting 1701. Some say it will be more difficult to implement his plan to redefine Israel's borders unilaterally and

withdraw from much of the West Bank.

But these are changing times. High oil prices are making Israel's opponents stronger. A middle-class society dependent on international investment and tourism can no longer afford war as it once did. The cost of continuing conflict to Israel and the region in human suffering and lost output, trade and investment is insupportable. The role of the UN and othe

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