Global Crude Oil Prices: Three Critical Issues to Watch

DENNIS U. ATUANYA | FEBRUARY 2011 | SOURCE: Seeking Alpha

The global economy is highly sensitive to the supply of crude oil, at present the dominant form of energy used to power the gamut of domestic and industrial processes around the world.

The current unrest in Egypt raised some degree of concern in major markets and sent Brent prices above the U.S. $100 per barrel mark for the first time since 2008.

Global Crude Oil Prices: Three Critical Issues to Watch

In 2009, a correlation was seen between global crude oil prices and attacks on oil and gas installations in Nigeria’s Niger Delta region. With the bitter aftertaste of the last economic crises still lingering, some analysts fear that spiraling crude oil prices may reverse the current – even if sluggish – global economic recovery.

There are then three potential drivers for global crude oil prices that need to be kept in view:

1. The Tunisia Syndrome

The current unease in the MENA (Middle East, North Africa) region, especially Egypt, follows from the spontaneous Tunisian mass protests which led to the ouster of that country’s president.

But that deep-seated pressure of social, political and economic discontent across the region had been seething for some years now. The current global concern is that the unrest may spread to other countries within the region, including countries that are critical to global crude oil supply.

The region holds about 60% of the world’s crude oil and 45% of the world’s natural gas reserves; it accounted for about 45% of global crude oil exports in 2009. Any disruption in the supply of resources from the region, therefore, would most likely ramp up prices quite substantially.

2. OPEC Crude Oil Supply

In terms of proved global reserves, the Organization of the Petroleum Exporting Countries (OPEC) holds about 50% of natural gas and 70% of crude oil. In addition it supplies about 40% of global crude oil consumption.

OPEC is widely believed to hold the marginal crude oil supply necessary for moderating global crude oil prices, but that may become untenable in the next few years. The high levels of energy subsidies in these oil exporter-countries have fueled rapid growth in domestic consumption.

During the period 1998 -2010, for example, the domestic demand for crude oil among the group grew by about two and a half times the global rate, according to the Center for Global Energy Studies (CGES) in London.

3. Emerging Markets

Emerging markets (particularly in Asia where the recession was not as deep ... perhaps having learned from its own financial crises of the late 1990s) have shown much stronger economic recovery from the last global downturn. These markets have been boosted by the influx of foreign investment.

According to International Monetary Fund projections, by the year 2013 (and that is only two years away) emerging markets’ share of the global economic output will be greater than 50% with China and India accounting for most of the increasing share. It also expects net government debt of the G-7 high-income countries to be 90% of GDP by 2015, up from 52% in 2007; developed economies employed substantial fiscal and monetary stimulus to fight the recent downturn and racked up substantial debt in the process.

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