Oil price shock: Pandora’s Box is opened

Tuesday, February 22, 2011
By Paul Martin

The last time the oil price lost all sense of gravity, as it threatens to again with the price of Brent crude now well north of $100 a barrel, it helped tip the world economy into the deepest recession since the 1930s.

By Jeremy Warner
22 Feb 2011

Is history about to repeat itself? Much depends on developments in the Middle East, but things are once more looking perilous.

By adding to energy costs, the effect of high oil prices is to reduce the amount of money for spending on other things, thereby undermining aggregate demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given what happened as recently as 2008, you would expect OPEC to be acting quickly to prevent the same thing recurring. By raising quotas with dispatch, OPEC might limit any further explosive increase in prices.

The wave of popular protest across North Africa and beyond has put that assumption in doubt. What happens to the world economy is not exactly a priority right now for the autocrats who dominate OPEC. Their focus is instead on survival. The big swing producer, Saudi Arabia, looks particularly vulnerable to further contagion in the region.

With nervousness turning to panic among key producers, this is not an environment conducive to the sort of prompt decision-making necessary to prevent the oil price running out of control again.

If the latest instability in the Middle East wasn’t enough excitement for the Energy Institute’s traditionally lively annual conference in London this week, there’s also the unprecedented divergence in benchmark oil prices to ponder.

The Rest...HERE

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