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Editorial comment

“There must be some kind of way out of here”, said the joker to the thief, “there’s too much confusion, I can’t get no relief.”‘Confusion’ has certainly been a watchword throughout much of 2011 as North America and Europe have struggled with debt and China with rising inflationary pressures. As the year draws to a shaky conclusion, it is still far from clear as to how the global economy will extricate itself from its current perilous position and avoid re-entering a period of deep economic recession.

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As ever, the price of crude oil has had a fundamental influence on global prosperity. Historically, all recessions since the 1970s have arrived on the back of oil price spikes, so with 2011 being the first year that the oil price will average above US$ 100 a barrel, the prospects do not look good. This statistic comes on the back of three large scale energy shocks over the past two years: BP’s oil spill in the Gulf of Mexico, Japan’s Fukushima nuclear disaster and supply disruptions and market volatility caused by the Arab Spring enacted across much of the Middle East. These events have exerted near constant pressure on oil prices and there is no imminent let up in sight.

For Europe the stakes are particularly high with unprecedented economic turmoil threatening the very future of the single European currency. French President, Nicolas Sarkozy, has even gone so far as to suggest that, “If the Euro explodes, Europe would explode.” Whilst this is perhaps political rhetoric, it underlies the real sense of foreboding pervading the overall economic picture.

‘There must be some kind of way out of here’, but it is not necessarily going to arrive through an immediate drop in oil prices. Despite a weakening economic outlook across vast swathes of the developed world, oil prices have remained resolutely high. Demand is still tight thanks to the voracious appetite of the world’s emerging economies. This has not been helped by the recent news from Khalid al-Falih, Chief Executive of Saudi Aramco, that it has halted its oil production expansion project having reached a target of 12 million bpd rather than its original objective of 15 million bpd. This decision was made in the face of increased production of unconventional oil in North America and elsewhere, which Saudi Arabia views as a genuine threat to its hegemony over oil prices. In recent years, Saudi Arabia has become a relatively safe source of spare capacity in times of supply disruptions. The Kingdom’s ability to boost output in the wake of the Libyan crisis was a case in point. However, without the promise of this fallback capacity, the global oil supply picture will be even more volatile, creating a greater inflationary effect on oil prices and ultimately further tightening the screw on the West’s struggling economies.

Whether a ‘relief’ in oil prices finally comes about as a result of a major economic crash in the weeks ahead or through a proactive increase in production by OPEC remains to be seen. However, what 2011 has shown is that global demand is such that oil prices at plus US$ 100 are sustainable over the longer-term and are very likely the least we can expect in the future. 

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