Global oil: Price paradox

Yet another year of challenges is upon us as crude oil makes no mistake in dictating the world economy. Although the world continues to recover from the 2008-09 global recession, the recovery is slow and jagged. In 2010, global oil prices responded primarily to speculations over the path to economic recovery. As a result, oil prices in 2010 rose due to the growth in demand associated with signs of economic recovery and falling supply. At the end of 2010, international oil prices were driven even higher paving way into 2011 as political and social unrest unfolded in many parts of the African and Middle Eastern economies. WTI crude prices increased from $82 per barrel at the end of November 2011 to more than $112 per barrel by April 2011. The rapidly increasing oil prices and expected supply disruptions continue to cast shadows over the future of oil prices. The oil market this year has been more volatile and impacted primarily by a couple of unforeseen events. The demand side is strongly affected by the European debt crisis and the ensuing economic instability. The triple disaster that struck Japan in the form of a Tsunami, earthquake and a nuclear catastrophe is another major source of low confidence. The International Energy Agency (IEA) in its October - Oil Market Report revised the demand for global oil down by 50 kb/d and 210 kb/d to 1mb/d and 1.3mb/d, respectively. Global oil demand has remained moderate during the year which could deteriorate with an economic lurch in developed nations. Supply side also remains interrupted. The death of Gaddafi has been largely taken positively by the market. One geopolitical treat to the oil supply has been the Libyan clash. Although the prospects for oil reserves in Libya are more secure now, there is no guarantee that the rehabilitation and the restoration of production would bring peace to the region. However, some alleviation is expected in the light crude oil market. The OPEC reference basket fell below $100 per barrel in October 2011 for the first time since mid-February 2011 due to weak performance of global crude due to the eurozone debt crisis. This fall was characterised by a decrease in all the components of the basket including both the North American and Middle Eastern grades. The largest decrease of 2.5 percent was seen in the Brent blends to $111.5 per barrel. The cascading affect of Brent blends was basically due to the restoration of Libyan exports. Given the volatility and a hazy outlook for global oil prices, the price movements remain uncertain. With global economic recovery fragile, there are chances of the ballooning up of sovereign debts in the eurozone. IEA and OPEC have also cut their estimates of global oil demand growth with the slowing pace of economic growth which is likely to keep the oil prices depressed. If the prices come down and average below $80 per barrel, exploration and drilling activities in high-cost areas may become unfeasible.