High oil prices, financial speculation, worry IEA

Oil Mar11.pngThe IEA (International Energy Agency) is now very worried about the impact of today’s high oil prices on the global economy.
Their chart above highlights the problem for the USA and EU. If oil prices average $100/bbl in 2011, then the EU (green column) will be paying more for its oil imports than in 2008, and the USA (yellow) nearly as much:
• The cost to the USA will be $385bn, 2.6% of GDP
• The EU will pay $375bn, 2.2% of GDP
As the IEA chief economist, Fatih Birol notes, this will cause a “serious problem for business and consumer confidence, which the U.S. economy desperately needs for sentiment to improve.” Whilst the EU is also at risk, because “Europe is the weakest link in the chain of the global economic recovery.”
Similarly, the Financial Times notes that “in the past – in 1974, 1979 and 2008 – sharp oil price rises have come shortly before recessions in leading advanced economies.”
Update: The head of the IEA, Nobuo Tanaka, has told the Wall Street Journal that “financial speculation was partly to blame for sharp oil-price movements“. And he went on to add that “the market is tightening because of economic recovery, but certainly speculation has a role and amplifies volatility.”
Tanaka’s comments support the blog’s own view. Increased Chinese and Western demand are not the only reason why prices are at $100/bbl. There are still near-record levels of inventory around the world. And, as Tanaka also noted, “OPEC and Saudi Arabia have enough spare capacity and are ready to produce more“.

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