Oil prices that have been driven to levels not seen since 2008 by the political turmoil in Libya and other North African and Middle Eastern countries pose a serious risk to global economic recovery, and also pose supply risks from a longer-term perspective, International Energy Agency Chief Economist Fatih Birol said Tuesday in Jakarta.
"This is a serious risk for the global economic recovery, and it is not good news for anybody in the world, producers and consumers alike," he said, talking to reporters at the Pacific Energy Summit and in a separate interview.
"At the beginning of this year, when oil prices were about $90/barrel, I said that prices had entered a danger zone in terms of global economic recovery. It is putting pressure on inflation -- we have seen examples of this in OECD countries as well as in developing nations -- and it is a major problem for oil importing countries in terms of trade balances."
Benchmark April Brent crude futures on London's InterContinental Exchange were up $2.06 cents Tuesday afternoon, changing hands at $107.80/b at 3:30 pm Singapore time (0730 GMT), as violence in Libya and Bahrain threatened to destabilize the key oil-producing Middle East and North African region. New York's main contract, light sweet crude for March delivery, meanwhile surged $7.64 to $93.84/b from last Friday.
The US market was closed for a public holiday Monday.
The potential loss of Libyan crude oil has already pushed oil prices to new two-year highs, with Brent futures hitting $108.15/b Monday.
And "we may see higher prices if the turmoil in key countries in North Africa and the Middle East continues in this way," Birol said.
LONGER-TERM PERSPECTIVE
Birol also noted that the current turmoil in the Middle East and North Africa should be looked at from a longer-term perspective.
"The IEA estimates, that in the next 10 years, 90% of the global growth in oil production need to come from the Middle East and North African countries, as the oil production outside of this region is in decline, from the US, from Europe, and the reserves are in these countries.
"And, of course, the recent developments in the Middle East and North Africa should be assessed in the light of these estimates," he said.
He also welcomed OPEC's offer to make up for any supply disruptions caused by producing countries in North Africa and the Middle East.
"We are watching the market. We want to make sure that the market is not very much disturbed by what is going on. We are ready to provide more crude in case there is a need for it," UAE oil minister Mohammed Bin Dhaen al-Hamli said Monday.
Birol further said that the IEA stood ready to use its emergency reserves -- which he said stood at 1.6 billion barrels -- if needed to make up for supply disruptions.
INFLATION AND TRADE BALANCES
"If oil prices were to remain at $100/b on average, countries like Japan and Indonesia [and others] would have some negative implications," Birol also said.
The Indonesia oil import bill would increase significantly at that level, according to IEA estimates, he said.
"In 2011, about 2.7% of the Indonesia GDP would need to go to cover the oil import bill, which is definitely a burden for the Indonesia economy and would put pressure on inflation," Birol said.
In Japan, it would be close to 3% of GDP that would need to go to cover the oil import bill, he said.
"These high prices put pressure on trade balances, weakening the purchasing power of consumers, households and industry, and also put pressure on inflation," he said, noting that significant increases in inflation had already been seen in countries such as England, China and India.
"Which may mean that central banks may have to adjust interest rates, which is not good news for the recovery."
Birol also said that at $100/b, the oil import bills of the major importing countries are approaching the levels seen in 2008, when oil prices peaked out at close to $150/b.
"If they go beyond $100, we may see that the threshhold in terms of the oil import bills may be higher than 2008, which is definitely not good news for global economic recovery."
IMPACT ON GAS MARKETS
Additionally, Birol said, there could be a knock-on effect from the regional turmoil and higher oil prices that could put extra pressure on European gas markets.
Though Libya exports about 15 billion cubic meters of gas/year, mainly to Italy, this will not come from any major disruption of exports.
The problem is that about 70% of the gas contracts in Europe are linked to oil prices.
"This should be a second degree burden on the economy, because the higher the gas prices will be, the higher the electricity prices will be, and this will put more pressure on inflation, in addition to the direct pressure from the oil prices."
This will only put more pressure on a delinking of long-term gas contracts from oil prices, a discussion that Birol has already said is going to "intensify" in 2011.
"This will be an additional push for the gas importing countries to put forward their arguments," he said.
