From the straight point of view of oil price stability, things will never be as good again as they have been [before]MENA governments started to wobble. That is not to say that the political regimes were not repressive or otherwise ugly… it is only to say that their politics were accepting enough of the Western governments to allow them to trade oil openly and freely with us.
Whether Brent [crude oil]stays at $118, where it was in European trading [last week] is a political question and not an economic one.
Peter Tertzakian: The Libyan situation, and more broadly, the issue of civil unrest occurring on moment's notice in any major oil-producing country in North Africa or the Middle East (and maybe even beyond), is likely to place a lingering premium (crisis option value) on oil prices over the next couple of years. This is akin to the "war premium" that we saw linger during the Iraq war.
Of course, the question is what is the magnitude of this premium, even when the Libyan situation settles. I suggest $10 a barrel is likely, though potentially higher if Algeria or another major producer gets more restless.
There are a few scenarios:
1) The situation in the region calms down: A lingering premium of $10 a barrel above the $80-$90 a barrel that is reasonable in the next couple of years in the context of no geopolitical noise.
2) The situation deteriorates to other major producers, like Algeria: Add another $10-$15 a barrel to the premium in the near term.
3) The situation spreads to Saudi Arabia: Add a lot more! But not for long, because at some point the market will recognize the impact on the global economy and oil demand estimates will be cut materially, moderating price with it. I think that point is not far off, somewhere around $120 a barrel. Not to mention the public will start screaming about higher gas prices.
What to use for 2011 and 2012? The next few weeks will be key. I suggest WTI of $95 to $105, assuming the contagion doesn't spread further. But the higher it goes, the faster it will fall.
NM: Obviously, no one can tell at this stage how the Libyan situation will be resolved and how quickly, nor whether unrest/revolution will spread - in particular to Saudi Arabia. Clearly, the markets will impose an uncertainty cost on the oil price until there is some clarity, and that could take a year: Remember that, after the fall of the Shah of Iran in 1979, it took another nine months before the Islamic fundamentalists came to power.
In this environment, $120 a barrel could easily prevail for a few months. Oil at $120 a barrel is the equivalent of 5.5 per cent of global GDP, the level at which the global economy starts to be affected. In 1979, oil's share of global GDP actually got to 8 per cent.
The level of oil prices will be a function then of how long the supply uncertainty in Africa and the Middle East lasts and what further disruption there is. My guess - and it really is a guess, as I am sure that even the King of Saudi Arabia can't predict the outcome for sure - is that this will take some time, and that the odds are high that the crisis will spread further in the region. I would certainly not rule out $150 a barrel in that event. If that happened and there was any sustainability to that price, fears of double-dip recession that we faced last spring would hit financial markets once more. If we got there (to $150 a barrel), there could be a great further short-term move in oil stocks in the interim, but it would be short-lived. Just reflect on 1990 when Kuwait was invaded, the oil price hit $40 a barrel but within a few weeks, the oil stocks in Canada at least had reversed all their gains and then some as the U.S. entered recession.
CW: So let's do some math. From the start of the year to today, we have seen oil prices rise by about $20 a barrel. At 90 million barrels a day of production - that is 32.85 billion barrels per year - the increment to the world's oil bill is $657-billion extra expenditure on oil if [that price increase is]sustained. Unless consumption drops sharply. History says it will drop only gradually. So that means consumers have $657-billion less to spend, which is bit more than 1 per cent of world GDP. Oil producers have incremental income of course. But it is doubtful they will spend their windfall right way, if at all.
For Euroland, where the price increases are the greatest and where there is very little locally produced oil, the impact will be severe. Japan will suffer too, but less than Europe. In North America, the loss to consumers will be offset somewhat by a windfall to local oil producers.