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Mar 18th 2004
From The Economist Global Agenda
Light crude is hovering around a 13-year high. But are companies protesting too much about high oil prices?
“FOR the last 30 years, the price of oil has been the single most important determinant of the economy and the stockmarket.” So claim the authors of “Oil Factor”, one of a spate of gloomy new books about energy. They claim that the oil price will soar above $100 a barrel “by the end of the decade, and possibly sooner”. Such a spike, they say, would drag the global economy into a severe recession.
You do not need to believe such scenarios (which rest on the dubious assumption of imminent oil scarcity) to be worried about the impact of oil prices today. After all, the OPEC cartel, which controls roughly half the world’s crude exports, has kept prices above $30 a barrel for much of the past three years. In America, petrol prices at the retail pump are approaching all-time highs. Headlines on both sides of the Atlantic have proclaimed an energy crisis.
On the face of it, oil consumers have much to worry about. On Wednesday March 17th, American light crude ended trading in New York at $38.18 a barrel, the highest closing price since October 1990, in the run-up to the first Gulf war. So far this year, consumers have paid an average price of $35 per barrel (based on American light crude), compared with $31 in 2003. Prices have been driven higher in the past week by concerns about terrorism in the wake of the Madrid bombings. Add to that worries about stocks in America: on Wednesday, the government released data showing that gasoline stocks fell last week by 800,000 barrels, to a level 5% below their five-year average, raising fears of a supply crunch (though crude stocks have risen slightly from their near-30-year lows in the winter).
At least for some gas-guzzling industries, the fear of exorbitant prices seems justified. Airlines, for example, have been hit hard by the surge in the price of jet fuel. American, Delta and several others announced a temporary fuel surcharge of $10 per ticket to compensate, only to reverse it when rivals did not follow suit. The chemicals business is also vulnerable, as it uses hydrocarbons both as a feedstock and as a source of energy. Du Pont, the world’s biggest chemicals firm, recently estimated that a $1 rise in the price of both oil and natural gas adds about $135m a year to its pre-tax costs.
But look beyond the most energy-intensive sectors, and the notion that high oil prices are quashing demand and wrecking firms is overdone. One reason is that OECD economies are less energy-intensive than three decades ago when the first oil shocks occurred, thanks to the shift out of manufacturing into services and information technology. And, in real terms, even the current “high” oil price of over $38 a barrel is still below half its historic peak.
The story is further complicated by the recent plunge of the dollar, the only currency in which oil is traded. The relative strength of the euro and sterling has greatly reduced the pain of dollar-price increases for firms in Europe (see chart).
But what of other big oil-guzzling economies? “Americans might whine about it, but they aren’t in pain because the oil price is $35,” argues Roger Diwan of PFC Energy, a consultancy. As evidence, he points to the robust growth in demand for oil in America in recent months—one of the main reasons why prices are now so high.
The same is true of China, which has a currency peg to the dollar and is thus fully exposed to the rising oil price, and has also, like many other developing countries, become much more reliant on oil in recent years as its economy has moved from agriculture to heavy manufacturing. Higher prices have not dented Chinese demand. In fact, China has just passed Japan to become the world’s second-largest oil consumer.
Certainly, some firms in energy-intensive industries are in for a rough ride as OPEC tries to keep prices high through America’s summer “driving season”. Indeed, the cartel shows no sign of reversing its recent decision to cut its official production limit (of 24.5m barrels per day) by 4% from April 1st. But claims that today’s oil prices amount to anything approaching a crisis for business at large are unfounded.
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