Nigeria’s Oil Industry – some worrying stats

Here are some statistics from The Economist on the oil industry in Nigeria.

* Nigeria produces 2.7m barrels a day
* 400,000 barrels of oil a day were stolen in April 2012
* $400bn of Nigeria’s oil revenue has been stolen or misplaced since independence in 1960
* Its 4 refineries work far below capacity, forcing Nigeria to import most of its fuel
* Government subsidies for petrol cost $16bn in 2011
* Fraud of $6.8bn has been exposed over a subsidy for petrol imports
* Pipeline sabotage accounts for more than 50% of the oil spills in Nigeria’s oil producing delta.

Regulatory uncertainty has assisted in making Nigeria’s oil industry stagnant – output is the same as it was a decade ago. However the major concern is that all this oil wealth should have benefited the population but the majority of them still live on less than $2 per day.

AS & A2 – Global and New Zealand Update for November exams

It is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question.

Indicators that you might want to mention are as follows:

The New Zealand Economy
The New Zealand economy expanded by 0.6 percent in the June 2012 quarter, while economic growth in the March quarter was revised down slightly to one percent. Favourable weather conditions leading to an increase in milk production was a significant driver of economic growth over the June quarter. The current account deficit rose to $10,087 million in the year ended June 2012, equivalent to 4.9 percent of GDP. Higher profits by foreign-owned New Zealand-operated banks and higher international fuel prices were factors behind the increase in the deficit during the year. Unemployment is currently at 6.8% but is expected to fall below 6% with the predicted increase in GDP. Annual inflation is approaching its trough. It is of the opinion that it will head towards the top end of the Reserve Bank’s target band (3%) by late next year.

The Global Economy
After the Global Financial Crisis (GFC) the debt-burdened economies are still struggling to reduce household debt to pre-crisis levels and monetary and fiscal policies have failed to overcome “liquidity traps”. Rising budget deficits and government debt levels have become more unsustainable. The US have employed the third round of quantitative easing and are buying US$40bn of mortgage backed securities each month as well as indicating that interest rates will remain at near zero levels until 2015. Meanwhile in the eurozone governments have implemented policies of austerity and are taking money out of the circular flow. However in the emerging economies there has been increasing inflation arising from capacity constraints as well as excess credit creation. Overall the deleveraging process can take years as the excesses of the previous credit booms are unwound. The price to be paid is a period of sub-trend economic growth which in Japan’s case ends up in lost decades of growth and diminished productive potential. The main economies are essentially pursuing their own policies especially as the election cycle demands a more domestic focus for government policy – voter concerns are low incomes and rising unemployment. Next month see the US elections and the changing of the guard in China. In early 2013 there is elections in Germany. The International Monetary Fund released their World Economic Outlook in which they downgraded their formal growth outlook. They also described the risk of a global recession as “alarmingly high”.

Napier – Positive and Negative Externalities

I have been rather light on blog posts over the last week as I was in Napier for the New Zealand National Premier Schoolboy Hockey Tournament. However externalities did eventuate at the end of the week with King’s College retaining its national title but also the oil spill in Napier which was right beside where we were staying.

Externalities are common in virtually all economic activities. They are defined as third party (or spill over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.

Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years, not least because of concerns about the link between the economy and the environment.

Remember the graphs for negative externalities of production and positive externalities of consumption:

AS – Supply and Demand – Oil refineries stumble on hard times

Although oil producing nations might not like the recent troughs in oil prices, refineries in Europe are experiencing good times even with petrol and diesel prices being relatively high.

According to The Economist refining hasn’t been the most profitable business as overcapacity has dogged the industry. Oil companies had assumed that the world demand for petrol would continue to expand rapidly and built refineries to cope with the this added pressure. However with oil demand peaking this led to an over-supply in the market. Furthermore in the developing world new and more efficient refineries have added to the problem and this had led to some changes in the market players this year.

* Petroplus (Swiss refinery) went out of business
* Shell bought a former Petroplus plant in London and downgraded it to a storage facility.
* Sunoco biggest refinery in north-eastern US is in trouble financially
* Refineries in Pennsylvania and the Virgin Islands have ceased production

Demand for petrol is falling in both the US and Europe as:

* People are driving less
* People are switching to more fuel-efficient cars – especially diesel. This has caused some concerns as Europe’s refineries cannot easily switch to producing more diesel.

Oil Prices 2012

The chart below from the Sustainability Blog shows the oil production has reached an effective cap at around 75 million barrels of regular crude per day.  Production over the past six years has increased little despite continued upward oil prices. This they argue has occurred as the oil industry passed a transition point and moved from an elastic supply curve to an inelastic supply curve.

While global oil demand remains relatively weak today, with the International Energy Agency predicting global oil demand growth in 2012 of around 1.1 million barrels per day, that inelastic supply curve could yet push oil prices back up to record levels which in turn will increase costs for the refining industry.

Are oil exporters the reason behind the global imbalance?

The Economist ran an article that focused on the global imbalance in the world economy. We have been accustomed to hearing about the USA being great spenders and running large deficits and the Chinese being big savers and running large surpluses. However those that have been running even bigger surpluses are the oil exporting countries which have enjoyed a huge windfall from high oil prices – according to the IMF $740bn of which 60% will come from the Middle East. This compares to China’s suprlus of $180bn.

The Economist stated that only a fraction of this oil surplus has gone into official reserves and therefore hasn’t attracted much attention. A lot the money has been put into equities, hedge funds etc through intermediaries in London. The affect of higher oil revenues on the world economy depends on whether the money earned is then spent on buying goods and services from oil importing countries – this maintains demand and the velocity of the circulation of money in the circular flow. In the oil crisis years of 1973 (400% increase) and 1979 (200% increase) 70% of the revenue earned by oil exporting countries was injected back into the circular flow on purchasing goods and services. The IMF estimates that less than 50% will be spent in the three years to 2012. For each dollar spent on oil from OPEC countries in 2011 there was the following spent on the exports from that country:

USA – 34 cents came back into the economy
EU – 80 cents came back into the economy
China – 64 cents came back into the economy

Normally a large current account surplus would be eroded over time by a stronger domestic spending and a higher exchange rate. However the Gulf currencies are pegged or closely linked, to the US$. The best way to reduce the current account surplus of the oil exporting countries is to increase public spending and investment which might reduce dependence on oil revenues and therefore less likely to become part of the resource curse.

Is there a Resource Curse?

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies with a lot of natural resources – energy and minerals. The curse comes in two forms:

1. With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.

2. This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

In 1995 Jeff Sachs, then a Harvard Professor, co-authored a paper with Andrew Warner in which they stated that countries with a higher proportion of resource exports had experienced a slower rate of economic growth. However, The Economist recently noted the research of two Swiss-based economists which draws different conclusions. They basically say that it is crucial to distinguish between the following:

Abundance – having lots of resources
Dependence – having a high proportion of exports in resource-related industries.

They found that greater resource abundance leads to better political institutions and more rapid growth. Those with poor political institutions – Zaire, Nigeria etc – are unlikely to develop other sectors of the economy to reduce dependency on natural resources. The chart below from The Economist shows that the recent growth of OECD countries that are energy exporters against other members that are neutral or oil importers. Although they have grown more over the years with an increasing oil price, their strengthening currency hasn’t affected their economy’s that much. The key test is when the resource runs out – have countries reinvested in areas that they can fall back on or has this investment gone into the energy industry itself. For the Aussies this is very important especially if China has a hard landing. Time will tell.

Higher petrol prices don’t seem to dampen US growth.

I like this graphic from the Wall Street Journal which shows that rising fuel prices haven’t affected the US economy like it did last year. The forecast if for rising GDP growth and a continued fall in unemployment. Interesting to note that consumer sentiment is up 4.4% with this recent rise in fuel prices compared toa drop of 4.7% in late 2011/early 2012. No doubt this is good news for Obama’s election campaign.

Strait of Hormuz – the economic ‘chokepoint’

The strait of Hormuz, in the Persian Gulf, is 21 miles across at its narrowest point and connects the world’s major oil producers with their markets overseas. Approximately 14 huge oil tankers pass through the strait per day carrying on average 17 million barrels of oil which equates to 20% of the world’s supply. Since the oil crisis years of 1973 (oil price up 400%) and 1979 (up 200%) the straight has been know as the most vulnerable economic ‘chokepoint’.

Iran has threatened to close the straight if any further sanctions were imposed on them (due to its contentious nuclear programme). They can easily follow through on their threat by deploying a stockpile of 2,000 mines.

So what would be the economic impacts if Iran did close the strait:

- It is predicted that oil prices will rise by 50% in a matter of days – US$160/barrel
- Fuel prices would follow suit and industrial economies would be hit hard by cost-push inflation- see graph below.
- China, which gets 50% of its oil imports from the area, would find it difficult to adjust to oil shortages
- Iran rely on oil revenue for 50% of its national budget. Oil is 80% of its export revenue.

Will it close?
For Iran to close the Strait would be like ‘shooting themselves in the foot’ – the Iranian economy would go through a major downturn with no doubt increasing inequality and levels of poverty. From 1st July this year the EU will put an embargo on Iranian oil imports to Europe worth about €13bn to Iran. The West know that Iran can’t do without oil revenue.

Oil prices: supply = demand. Yeah right!

Going through supply and demand with some of my classes you cannot help thinking that sometimes the textbook isn’t that relevant.

If you have read Matt Taibbi’s book “Griftopia” you’ll have come across an example of how the theory of supply and demand doesn’t seem to work in modern times. In the book he talks about the amount of money invested in commodity indices – from 2003 to July 2008 the amount of moeny invested in commodities rose from US$13bn to US$317bn. Not surprisingly commodities on various indicies rose sharply during this time. Oil in particular rose significantly – from US$26 per barrel in January 2003 to US$149 in July 2008.

In May 2008 a top oil analyst at Goldman Sachs conceded that the increase in oil prices was without question the increased fund flow into commodities. The bizzare issue here was that oil supply was at all time high and demand was actually falling.

April 2008 – secreatry-general of OPEC stated that “oil supply to the market is enough and high oil prices are not due to a shortage of crude.” US data showed that oil supply rose from 85.3m barrels/day to 85.6m from the first quarter to the seconad quarter in 2008. At the same time oil demand dropped from 86.4m barrels a day to 85.2m. Furthermore around this time two new oil fields in Saudi Arabia and Brazil were about the start pumping vast amounts of oil. Some analyst stated that the increase in oil price was due to the security issues in the gulf but OPEC officials expressed the fact that not one tanker had been attacked and hundreds of them are sailing every day. Where were the lines at the petrol stations like after the oil embargoes and the Iran – Iraq war in the 1970’s?

The press came to the conclusion that the price increase was due to economic factors:

1. The nervous US dollar – investors were anxious about holding US dollars and prefered to hold commodities.
2. There was an increasing demand for oil especially the emerging nations like China

According to Taibbi, although both of these factors were real, it is very doubtful that they could have had such an impact that oil prices would reach US$149. Chinese consumption did increase – between January 2003 and June 2008 oil consumption in China increased by 992,261,824 barrels. However during the same time speculators bought 918,966,932 barrels of oil – according to the Commodity Futures Trading Commission (CFTC). By December 2008 the bubble had burst and oil proces plummeted along with the price of other commodities – oil was trading at US$33 per barrel. So now the process has started all over again. Will we see oil tankers just sitting in the gulf waiting for the oil price to go up?

Canada opts out of Kyoto

The Kyoto Protocol was initially adopted on 11 December 1997 in Kyoto and Canada was one of the proactive countries in its implementation. However, on 13th December 2011, Peter Kent, the environment minister, announced that Canada was withdrawing from the agreement becoming the first country to do so. So, why the reversal of the commitment to the cause of reducing CO2 emissions?

From its inception, Canada’s Kyoto target was a 6% total reduction in CO2 emissions by 2012 relative to 1990 levels. However, all the positive rhetoric did not materialise and Canada has struggled to control, let alone, reduce its emissions. Between 1990 and 2009 emissions were 17% higher as free market policies of the Prime Minister Stephen Harper started to become much more prevalent in the economy.

It seems that the Canadian government is more concerned with the health of their economy rather than the planet. With rising oil prices it will make it even more attractive to extraction of oil from the Alberta tar sands – the only worry being that it will increase considerably the CO2 emissions in the atmosphere. It’s a choice of more growth or increasing CO2 emissions.

____________________________________________________________

The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

econoMAX

Oil dependent Saudi – an artist’s impression

Full-time doctor but part-time artist, Ahmed Matter creates some very interesting art. Using x-rays and magnetism the art he produces is a critical voice against the insanity of oil dependency and the oil production that has had a decisive impact on the region as a whole. The petrol pump below is gradually transformed into the body of a human being – in blue-tinted x-ray pictures of the head and upper body. And the pump nozzle itself becomes a pistol, which the spectral human figure holds to its head – a portent and probably also a criticism of the Saudi government, which places reckless emphasis on oil exports. Do we have another case of a classic resource curse?

Making sure Brazil doesn’t go Dutch

I have written quite a few posts on the dreaded ‘Dutch Disease’ and one has to wonder about the Brazilian economy and its remarkable offshore oil bonanza.

Since 1960’s Holland’s sudden gas wealth pushed up its currency and crippled its manufacturing sector, economists have been wary of easy money, even coining a term – Dutch Disease – for its impact on the rest of the economy.

By 2020 it is expected that Brazil will be producing 5 million barrels of oil a day which takes it into the top 5 oil producers in the world. However the big question is will it succumb, like so many before it, to a lack of investment in other areas of the economy so that when the oil runs out they have other sectors that can contribute to growth.

In order to avoid a Dutch Disease scenario it is imperative that Brazil looks to improve on its productivity of the rest of the economy. According to The Economist it aims to invest in education, culture, science and technology, environmental sustainability and poverty eradication. This seems to be a rather ambitious list of goals, but as with Norway such spending could be worthwhile provided clear targets were set and the money was professionally managed. One of the key areas that needs to be developed is infrastructure for non-oil exporters – upgrades of roads and port facilities. However the sovereign fund, which has been instrumental in the Norwegian success story, might not have sufficient funds to invest even with the oil bonanza. The coastal states of Brazil have in the past received most of the royalties from offshore oil but now the Federal Government want an increasing share. With the Federal share shrinking there will less strategic investment as most of the funds will go into current spending. One wonders about the colour of the overalls worn by President Lula Da Silva and his associates in the picture above – is this a bad omen?

A different resource curse

Nigeria, the eleventh largest producer and the eighth largest exporter of crude oil in the world, typically produces over 2.4 million barrels per day (b/d) of oil and natural gas liquids. However, according to the IMF, while the Nigerian economy has benefited $800 billion dollars in oil revenue since 1960, this has added basically nothing the Nigerian economy or the standard of living of the average Nigerian. In fact the World Bank estimates that since 1960 $100 billion of the $800 billion in oil revenues have gone missing.

For most economies that have natural endowments like oil or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trapin which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy. You can read the full version of this article by going to the econoMAX website below:

econoMAX

Oil Shocks – are they bad for the global economy?

Tobias Rasmusses and Agustin Roitman, two IMF economists, in a recent paper have argued that oil shocks are not that bad for an importing country. They have suggested that a 25% increase in oil prices will cause a loss of real GDP in oil-importing countries of less than 0.5%, spread over two to three years.
“One likely explanation for this relatively modest impact is that part of the greater revenue accruing to oil exporters will be recycled in the form of imports or other international flows, thus contributing to keep-up demand in oil-importing economies”
However in considering the impact of higher oil prices one must look at what caused them to rise in the first place. There have been supply-side and demand-side reasons.

1973 – 400%↑ – supply-side– Yom Kippur War oil embargo
1979 – 200%↑ – supply-side – Iran Iraq War
1990 – 50%↑ – supply-side – Iraq War
2000 – 75%↑ – demand-side – Global growth.

What it is important to remember is that when there is higher global growth there likely to be higher oil prices, which is a positive. Supply-side policies also play a role – 1970’s and 1990-91 – especially the disruption to supply in Libya this year. “Finding that the negative impact of higher oil prices has generally been quite small does not mean that the effect can be ignored.”
Rasmusses and Roitman do not rule out more adverse effects from a future shock that is driven largely by lower oil supply than the more demand-driven increases in oil prices that have been the norm in the last two decades.

Has OPEC lost its price regulator status?

The Organisation of Petroleum Exporting Countries (OPEC) sell about 30% of the world’s crude oil and has been identified as a price regulator, supplying more into the market as it felt necessary – this has led to accusations of price fixing.

However recent days has seen OPEC’s influence over price diminish. Even when you consider the inconclusive OPEC meeting last week on production quotas, its members were already breaking their quotas putting an extra 1.5 million barrels of oil a day on the market. As you know this should shift the supply curve to the right and therefore reduce inflationary pressures on the price of oil. However for a couple of weeks the price of a barrel of oil has been around US$100. Furthermore when news got out that OPEC ministers were squabbling the market reacted by increasing the price of oil and it seemed to be more concerned about the oil supply rather than the collapse of OPEC.

With the actuality of the global supply and demand it now seems that OPEC has lost control of the oil market. It transpires that the OPEC meeting broke down mainly because Iran and others hindered a bid by Saudi Arabia and its Gulf allies to increase output at a time of world economic weakness. Rejecting the rise keeps oil prices high which helps Iran’s bank balance as well as having a negative impact on any recovery from the US economy.

The Iran led opposition to rasing output was about “sticking it to the Saudis and psychologically sticking it to the US”

Here is a clip from AlJazeera

Oil prices: self-fulfilling pessimism

Over the last two months the price of oil has gone up US$30 dollars a barrel and currently stands at US$110 . In the US there is the concern that the periods of stagflation evident in the oil crisis years of 1973 (oil prices up 400%) and 1979 (oil prices up 200%) are back to haunt the economy. James Surowiecki in The New Yorker mentioned that the recent increase in oil prices shouldn’t really have a significant impact on the economy for the following reasons:

* In the US petrol is a relatively small percentage of household spending.
* It is estimated that an increase in oil prices by $20 a barrel should equal only a 0.5% decline in GDP
* The current increase is not at the same level of previous spikes
* Not all price increases have an effect on growth eg. between 2002 and 2006 oil prices increased 150% yet the US economy grew at a high rate.

Research has shown that rising petrol prices have a notable influence on the level of happiness of American consumers. Petrol prices are probably the most visible prices in the market – every petrol station has them. Behavioural economist Dan Ariely has argued that the way we buy petrol watching the dollar counter ever increasing is essentially depressing. According to Surowiecki the danger at the moment is more psychological than economic. Some economists have suggested it is only when the price of a barrel of oil gets above US$130 that we will experience an oil crisis like those in the past.

Oil Supply – The Strategic Petroleum Reserve

With the disruption in oil production in Libya petrol prices at the pump are creeping ever higher. As reported in The Economist, Spain import 12% of its oil from Libya and has reduced the speed limit to save on fuel consumption.

In the US there has been a lot of pressure on President Obama to release part of the country’s Strategic Petroleum Reserve (SPR) in order to reduce oil prices and assist with the global recovery. Currently the US has 727m barrels in the SPR and this would keep the US economy going for 38 days. The reserve was set up after the supply shock of the 1973 Yom Kippur War when oil prices went from $2.50/barrel to $10/barrel. On previous occasions oil has been released form the SPR:

Hurricane Katrina 2005 – 30m barrels released = Oil prices↓ 3.7%
Gulf War 2003 – 34m barrels released = Oil prices ↓ 33.4%

Other countries do also have reserves
European countries – 420m barrels
Japan – 320m barrels

However, releasing some of the SPR might mean that OPEC feel less inclined to pump more oil but the issue of high prices has a lot to do with long-term global demand and supply rather than the current state of Libya.

Will Japan’s Crises Disrupt Global Economic Recovery?

Here is an interview with The Economist writer Greg Ip which was screened yesterday on the PBS Newshour.
Key points are:
* Japan is the key supplier for a lot of manufacturers – it is the world’s largest suppliers of flash memory and of semiconductors over the last few years
* Japan has virtually no natural energy resources of their own – very dependent on nuclear power
* Loss of nuclear power will increase demand for fossil fuels – with this and the unrest in the Middle East global oil prices will rise
* Japanese seem to have the funds to rebuild the economy as they are very high savers. They have bought all their government’s debt to date

Oil prices↓ and ¥↑?

With the terrible events overnight in Japan one wonders how the Japanese economy is going to be affected. However it was interesting to notice what has happened to the Yen against the US$ and the price of oil.

The US$ dropped against the Yen – was ¥82.8 but now is ¥81.8. Reasons for this:
1. The flow of insurance pay-outs that will no doubt follow the earthquake/tsunami.
2. Companies repatriating funds as happened after the Kobe earthquake in 1995

Benchmark Brent crude oil contracts fell 1.1 per cent to $114.16. Reasons for this:
1. The closure of Japan’s refineries damped immediate demand for crude oil.
2. Considering Japan’s huge oil consumption, around 4.4 million barrels a day, investors feared the demand would fall after the disaster at least temporarily, triggering large scale of sell-offs across markets.

According to the FT in London:
Natural disasters can actually be positive for growth because governments spend to repair the damage. After the Kobe earthquake in 1995, the Nikkei fell about 8 per cent in the following five days, then recovered 5 per cent in the next two weeks.

In a broader sense this earthquake is probably the last thing that the Japanese economy needed – namely its ability to pay in order to get the country back to a growing level of economic activity. However, although Japan’s government is highly indebted its people are very wealthy and there are many ways that you can tap into this wealth.

It seems that oil prices will be downward until the damage in Japan is fully assessed. But there always remains the threat of further political turmoil (sorry about the pun) in the Middle Eastern countries.

Libya and world oil

In 2008, at the height of the financial crisis, a barrel of oil reached $147 and amidst the turmoil in the Middle East there are concerns that this figure will reach over $200 a barrel. If this transpires there is a real risk of a double-dib recession especially in the US and Europe – if not New Zealand. In Libya, as rebels took control of the port of Tripoli its critical oil supplies remained squeezed, production from most of Libya’s oil fields was down to very low levels. The country’s wealth largely comes from oil and whoever controls the oil fields will ulitmately control the country.

Libya in the Global Oil Market

The Economist website has some good statistics about the oil industry. Libya sends 1.4m barrels/day to global markets which is around 2% of global demand. This makes Libya the thirteenth largest oil exporter. Saudi Arabia the worlds biggest exporter, and country with significant spare capacity, is already pumping an extra 600,000 barrels per day to make up for the shortage on world markets.

A recovering global economy had convinced traders that demand for oil was going to rise by about 2 percent in 2011. Some industry experts and Wall Street visionaries were predicting a gradual return to $120 and even $150. The thinking was that investors would pour money into the commodity markets. This was due to the huge increase in demand from developing countries which was threatening to obliterate OPEC’s spare capacity – see graph below.

If prices keep climbing, consumers will in all likelihood tighten their belts. If prices stay high for long, the impact could be severe: every oil shock of the past 40 years has helped push the global economy into recession. Nariman Behravesh, senior economist at IHS Global Insight, said that every $10 increase in the price of a barrel of oil reduces economic growth by two-tenths of a percentage point after one year and a full percentage point over two years - New York Times.

However, as the world is so dependent on oil there is little room for supply disruptions. Spare capacity is at 5 million barrels a day which is approximately 6% of what the world consumes every day. Although this is 4% higher than in 2008 it is still worringly low when one considers the demand pressures coming from developing countries like China and India. However that is not even taking into account the loss of about one million barrels a day exported from Libya. If Libyan oil was to be removed from the oil market it would represent the 8th largest oil shock in history – see graph below.
Much now hinges on what happens next in the Middle East. The price spikes that accompanied the two Persian Gulf wars did not have deep impacts because of they did not last long enough. But several oil price increases have preceded economic downturns. The biggest shock followed the 1973-74 OPEC embargo, which quadrupled oil prices and helped produce stagflation, a period of slow growth, high unemployment and inflation. The 1979 Iranian revolution caused another shortage, and again American motorists were forced to wait in long lines for gasoline. Oil prices surged, but they did not stay elevated for long, as Mexico, Nigeria and Venezuela expanded production and OPEC lost its unity. Oil prices remained low for years, and the economy through the later half of the 1980s and most of the 1990s was generally strong. New York Times