High oil price threatens global economic recovery

New York and London oil prices hit a nine-month high on Friday, reaching the level when large-scale turmoil broke out in Libya in the first half of 2011, and threatened the global economic recovery anew.

IRAN FACTORS

Crude oil prices have soared more than 10 percent this year, reaching 109.77 U.S. dollars a barrel on the New York Mercantile Exchange and 125.47 dollars in London.

The oil price outlook remains bullish mainly due to Iran, the world’s fourth largest oil producer and the second largest exporter in the Organization of Petroleum Exporting Countries (OPEC).

The United States and Europe have imposed strict economic sanctions on Iran since 2011 in order to force it to give up its nuclear program. The United States also froze the assets of Iran’s central bank and the European Union decided to start an oil embargo on July. 1.

Iran responded to the sanctions by cutting its oil exports to Britain and France, and threatening to close the Strait of Hormuz, which would further reduce Iran’s oil exports.

The UN nuclear watchdog International Atomic Energy Agency (IAEA) released a report last week showing a large expansion of uranium enrichment in Iran. This report increased worries about more confrontation between Iran and the West.

Meanwhile, Ian Taylor, head of the world’s biggest oil trading company Vitol Group, said Brent crude could spike as high as 150 dollars a barrel if Israel launches a strike on Iran’s nuclear facilities.

ESCALATING PRICE

U.S. Treasury Secretary Timothy Geithner said in a media report that the United States has not excluded the possibility of tapping its strategic oil reserves after carefully weighing the circumstances. The IAEA used the strategic petroleum reserve in July 2011 and offered a total of 60 million barrels of oil in response to the supply disruption in Libya.

However, analysts believe developed countries cannot find legitimate reasons for taking such actions again. That’s because the disruption in Libya was due to the war, while the supply reduction this year was due to economic sanctions imposed by the West.

Some politicians counted on offers of extra crude from OPEC’s largest oil exporter Saudi Arabia, which raised production and boosted exports to make up the shortfalls left by Libya in 2011.

However, JBC Energy Consulting estimated, due to a lack of investment and a decline in exports, that Iran’s output could possibly fall to 300,000 barrels per day this year.

Goldman Sachs said in a report that OPEC’s spare oil capacity has declined to a “dangerously low” level, and could not fill the gap left by Iran.

J.P. Morgan estimated Brent crude for delivery this year would rise to around 135 dollars a barrel. Goldman Sachs estimated that the price would reach 127.5 dollars. Merrill Lynch believed oil prices would soar to 200 dollars a barrel in nearly five years.

IMPACT ON ECONOMIC RECOVERY

The United States has revived its economy from its worst recession in generations since the beginning of 2012. The American unemployment rate fell to 8.3 percent in January, the lowest level in nearly three years.

Meanwhile, some major U.S. manufacturing companies, such as General Motors and Chrysler, announced that they were operating at a profit again.

However, escalating oil prices would threaten the weak economic growth. The International Energy Agency warned that the market was returning to the same exceptionally taut situation that prevailed in the first half of 2008.

For a start, the rise in oil prices has helped push U.S. retail gasoline prices to record levels for this time of year. Gas pump prices have reached 3.65 dollars per gallon, up about 5 percent since January.

David Rosenberg, chief economist of a Canadian asset-management firm, said Americans could see a national average of around 5 dollars a gallon by May.

Secondly, the U.S. Federal Reserve considered embarking on a further round of third Quantitative Easing Policy, dubbed QE3, to jumpstart the stalled economy.

Due to high oil prices, the U.S. government sent conflicting signals over whether it is ready to launch QE3. Launching QE3 would be likely to further stoke inflation, and job growth could not be achieved.

Worse still, high oil prices added downside risks to the European countries that have suffered economic downturns due to the debt crisis.

The European Commission last week forecast a 0.3 percent contraction in the eurozone economy this year and data published this week showed weak economic activity in Europe’s most powerful economies, Germany and France.

Larry White, an economics professor at New York University, said Europe heavily relies on oil imports and increased prices would spark fresh worries that the region could tip into recession.

Iran is also the main oil supplier to Japan, India and South Korea. A decline in exports from Iran and a rise in prices would impact those countries as well.