Oil Price Enters ‘Danger Zone’ – Financial Times

High oil prices threaten to derail the fragile economic recovery among developed nations this year, the leading energy watchdog has warned, putting pressure on the Opec oil cartel to increase production.

Over the past year the oil import costs for the 34 mostly rich countries that make up the Organisation for Economic Co-operation and Development have soared by $200bn to $790bn at the end of 2010, according to an analysis by the International Energy Agency.

The increase, due to high crude prices, is equal to a loss of income of about 0.5 per cent of OECD gross domestic product, according to the IEA.

“Oil prices are entering a dangerous zone for the global economy,” said Fatih Birol, the IEA’s chief economist. “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”

Oil prices have edged closer to $100 a barrel in recent weeks and Brent crude hit $95 a barrel for the first time in 27 months on Monday as the economic recovery has gathered pace.

Although oil prices dropped on Tuesday, the warning from the IEA will put pressure on Opec to increase its production. Despite the high prices, oil ministers decided last month to leave their quotas unchanged.

Ali Naimi, the Saudi oil minister, repeated at the time that he favoured an oil price of “$70 to $80 a barrel” and that there were no plans to convene an extraordinary meeting before June 2 this year.

However, according to Mr Birol, “it is not in the interest of anyone to see such high prices”.

OECD countries account for about 65 per cent of all global oil imports, he said. “Oil exporters need clients with healthy economies but these high prices will sooner or later make the economies sick, which would mean the need for importing oil will be less.”

In the very short term, therefore, “it may not be a bad idea that the producers are ready to increase production and show their understanding that these high prices are not good for the global economy,” he added.

Oil consuming nations, meanwhile, need to accelerate their efforts to reduce their reliance on oil, especially for transportation, he said. According to the IEA’s analysis, the European Union has seen its import bill rise by $70bn during 2010, equal to the combined budget deficits of Greece and Portugal.

On top of the high crude prices, Europe is still to feel the full impact of higher gas prices as 75 per cent of its gas contracts are linked to oil prices. The weak euro against the US dollar will also amplify the cost.

The US, meanwhile, has seen its bill jump by $72bn. Japan, which imports more than 99 per cent of its energy needs from oil, gas and coal, is paying an additional $27bn. Less developed nations are also being hit, seeing their bill rise by $20bn, equal to a loss of income of almost 1 per cent of GDP.

The ratio of countries’ oil import bills to GDP, a key measure of the cost of oil prices on economies, is close to levels last seen during the financial crisis in 2008, Mr Birol warned.

If oil prices remain above $90/barrel for the rest of this year then the ratio for the European Union will be 2.1 per cent – close to the 2.2 per cent level it reached in 2008.

“It is a very telling story. 2010 rang the first alarm bells and 2011 price levels could bring us to the same financial crisis times that we saw in 2008,” said Mr Birol.

Read more at Andy Sutton’s Extemporania

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