High oil prices pose serious risk to global recovery: Birol
Jakarta (Platts)--22Feb2011/538 am EST/1038 GMT
Oil prices that have been driven to levels not seen since 2008 by the
political turmoil in Libya and other North African and Middle Eastern
countries pose a serious risk to global economic recovery, and also pose
supply risks from a longer-term perspective, International Energy Agency Chief
Economist Fatih Birol said Tuesday in Jakarta.
"This is a serious risk for the global economic recovery, and it is not
good news for anybody in the world, producers and consumers alike," he said,
talking to reporters at the Pacific Energy Summit and in a separate interview.
"At the beginning of this year, when oil prices were about $90/barrel, I
said that prices had entered a danger zone in terms of global economic
recovery. It is putting pressure on inflation -- we have seen examples of this
in OECD countries as well as in developing nations -- and it is a major
problem for oil importing countries in terms of trade balances."
Benchmark April Brent crude futures on London's InterContinental Exchange
were up $2.06 cents Tuesday afternoon, changing hands at $107.80/b at 3:30 pm
Singapore time (0730 GMT), as violence in Libya and Bahrain threatened to
destabilize the key oil-producing Middle East and North African region. New
York's main contract, light sweet crude for March delivery, meanwhile surged
$7.64 to $93.84/b from last Friday.
The US market was closed for a public holiday Monday.
The potential loss of Libyan crude oil has already pushed oil prices to
new two-year highs, with Brent futures hitting $108.15/b Monday.
And "we may see higher prices if the turmoil in key countries in North
Africa and the Middle East continues in this way," Birol said.
Birol also noted that the current turmoil in the Middle East and North
Africa should be looked at from a longer-term perspective.
"The IEA estimates, that in the next 10 years, 90% of the global growth
in oil production need to come from the Middle East and North African
countries, as the oil production outside of this region is in decline, from
the US, from Europe, and the reserves are in these countries.
"And, of course, the recent developments in the Middle East and North
Africa should be assessed in the light of these estimates," he said.
He also welcomed OPEC's offer to make up for any supply disruptions
caused by producing countries in North Africa and the Middle East.
"We are watching the market. We want to make sure that the market is not
very much disturbed by what is going on. We are ready to provide more crude in
case there is a need for it," UAE oil minister Mohammed Bin Dhaen al-Hamli
Birol further said that the IEA stood ready to use its emergency reserves
-- which he said stood at 1.6 billion barrels -- if needed to make up for
INFLATION AND TRADE BALANCES
"If oil prices were to remain at $100/b on average, countries like Japan
and Indonesia [and others] would have some negative implications," Birol also
The Indonesia oil import bill would increase significantly at that level,
according to IEA estimates, he said.
"In 2011, about 2.7% of the Indonesia GDP would need to go to cover the
oil import bill, which is definitely a burden for the Indonesia economy and
would put pressure on inflation," Birol said.
In Japan, it would be close to 3% of GDP that would need to go to cover
the oil import bill, he said.
"These high prices put pressure on trade balances, weakening the
purchasing power of consumers, households and industry, and also put pressure
on inflation," he said, noting that significant increases in inflation had
already been seen in countries such as England, China and India.
"Which may mean that central banks may have to adjust interest rates,
which is not good news for the recovery."
Birol also said that at $100/b, the oil import bills of the major
importing countries are approaching the levels seen in 2008, when oil prices
peaked out at close to $150/b.
"If they go beyond $100, we may see that the threshhold in terms of the
oil import bills may be higher than 2008, which is definitely not good news
for global economic recovery."
IMPACT ON GAS MARKETS
Additionally, Birol said, there could be a knock-on effect from the
regional turmoil and higher oil prices that could put extra pressure on
European gas markets.
Though Libya exports about 15 billion cubic meters of gas/year, mainly
to Italy, this will not come from any major disruption of exports.
The problem is that about 70% of the gas contracts in Europe are linked
to oil prices.
"This should be a second degree burden on the economy, because the higher
the gas prices will be, the higher the electricity prices will be, and this
will put more pressure on inflation, in addition to the direct pressure from
the oil prices."
This will only put more pressure on a delinking of long-term gas
contracts from oil prices, a discussion that Birol has already said is going
to "intensify" in 2011.
"This will be an additional push for the gas importing countries to put
forward their arguments," he said.
--Thomas Hogue, firstname.lastname@example.org
--Anita Nugraha, email@example.com
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