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David Strahan: Oil price set to double if production is cut off

David Strahan, Independent/UK
As Libyan output slumps, chances rise of a global supply shock that could push the UK back into recession.

Oil prices could hit $200 a barrel if the unrest in the Middle East spreads to countries such as Algeria and Saudi Arabia, according to analysts at Nomura. They predicted a doubling in the price if production were to be cut off by the world’s biggest producers.

Oil hit a 30-month high last week as the turmoil in Libya cut supplies by over a million barrels a day, raising the chances of a global supply shock that could push the UK economy back into recession.

… Italy is the country most exposed to the shortfall – buying almost a quarter of its oil imports from Libya – followed by France and Spain. They will now have to bid for replacement supplies on the open market. Britain relies on Libya for less than 10 per cent of its oil imports, and produces around 1.4 million barrels per day (mb/d) from the North Sea, while consuming 1.6 million.

Libya produces less than 2 per cent of global consumption with 88.5 mb/d, and there should be no immediate shortage of oil because of high oil stocks and spare capacity.
(27 February 2011)
Also from David Strahan: Old Iran hand casts doubt on Saudi, Libya . -BA

A Tipping Point for Oil Prices

Clifford Krauss, Green (blog), New York Times
With speculation calming, at least for the moment, oil prices are no longer soaring higher and higher every day. But prices are at a tipping point.

… if we go much higher, all bets are off. Spending on petroleum products is a relatively small fraction of the economy, but it carries psychological weight. And because petroleum products are tied to transportation costs, higher oil prices can spur inflation.

So what could send prices still higher?

It seems clear that Libya is going to be unstable for a while, which should prevent prices from going much lower. Its 1.5 million barrels a day in exports account for less than 2 percent of world output, but its high-quality crude is difficult to replace.

Still, Libya alone cannot bring about the kind of oil shock that would force American motorists to wait in long lines to fill up as they did in the 1970s. Refineries in the United States can handle sourer crudes, and Saudi Arabia is pumping more to fill the gap.

Supplies in the world are tight, but not as tight as they were in 2008, when oil prices soured to nearly $150 a barrel. That’s because demand in Europe and the United States is still soft, and the Saudis have more spare capacity. But demand in China and the developing world is growing. Thus the tipping point.

So the question remains whether the contagious rebellion that has spread from Tunisia to Egypt to Yemen to Bahrain will take any more production offline. Most of the countries suffering problems are not major oil producers. Saudi Arabia appears secure, for the time being.

The countries to watch in the region are Algeria and Bahrain.
(25 February 2011)

WSJ, Financial Times Raise Issue of Oil Prices Causing Recession

Gail Tverberg, Our Finite World
The idea that high oil prices cause recessions shouldn’t be any surprise those who have been following my writings, or those of Dave Murphy, or those of Jeff Rubin. Yesterday, though, the Wall Street Journal finally decided that to mention the idea to its readers, in an article called “Rising Oil Prices Raise the Specter Of a Double Dip“. The quote they highlight as a “call out” is

When Consumers spend more at the pump, they often cut back on discretionary purchases.

The WSJ shows this graph, linking oil price hikes to recessions:

Figure 1. Wall Street Journal graphic showing connection between oil price rise and recession.

A Financial Times blog by Gavyn Davies says something very similar:

Each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices. Sometimes (e.g. in the 1970s and in 1990), the surge in oil prices has been due to supply restrictions, triggered by Opec or by war in the Middle East. Other times (e.g. in 2008), it has been due to rapid growth in the demand for oil.

But in both cases the contractionary effects of higher energy prices have eventually proven too much for the world economy to shrug off.

In this post, I explain what the WSJ and Financial Times articles are missing regarding the connection between oil and the economy. I also explain how the inability of oil prices to rise very far suggests that the downslope may be considerably steeper than most models based only on the Hubbert curve would predict.
(25 February 2011)