Increase in oil prices creates few problems for the global economy

Ever wondered why the recent shift in the price of oil has not had the same destructive impact as the one in 1979? Instead of crumbling as it did in the early 1980s, the global economy continued its rising course, defying statistics, theories and rules. The explanation is simple: The price hike in 1979 happened after the limiting of production in Iran due to the revolution. The decline in production by 4 million barrels per day had gradually led prices to $40 per barrel. That crisis not only undermined the market’s confidence in the steady production of crude oil, but it also increased any negative effect. The decision by oil-consuming power-production plants for an immediate switch to coal had dramatic and conflicting consequences. The global oil traffic went down by a third. This time, though, the causes were different. In the course of a global economic growth, demand for oil increased as all oil companies had reduced their extraction rate. At the start of the year OPEC member-states produced 1.5 million barrels per day more than the oil consumed, but as prices rose propelled by strong demand and not due to an unpredictable political crisis, no one really got worried. A great portion of oil consumption is destined for transportation, where consumers can bear the increase even if they will not be happy. In Europe the price of oil can also be controlled by the oil tax incorporated. In July 2005 the forecast about the rise in consumption was at 1.7 million barrels, but now this has gradually declined to 1.03 million barrels. Yet even this reduced figure does not dictate a proportionate rise in global tanker capacity, as a third of this growth is meant for the countries in the Middle East and the former Soviet Union, which do have any shipping needs thanks to their geographical position. The remaining rise of 770,000 barrels per day is mainly destined for China and other countries in the same region. In shipping capacity this represents less than 5 million dwt. Considering that nowadays global capacity has grown by 12 million dwt in 2006, it is hard to explain where this momentum in the tankers market comes from. Next year may prove better. China’s growth is unlikely to slow down, while the US, too, will be in the market for more oil, given that the market now reacts when prices rise.

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