No more cheap oil
Since the beginning of 2008, oil prices have set several records. And last week, they hit another new level - crude-oil spot prices and oil futures reached nearly $120 a barrel. This latest spike in prices was due to the earlier minor disruptions in oil production - the Nigerian rebel group attacked oil pipelines in the region, and a Japanese oil tanker was struck off the coast of Yemen.
The recent increases in oil prices are due to a slowdown in oil-supply growth and the surging demand from developing countries, in particular China and India.
A falling US dollar has also pushed up the oil price, since oil is traded in the currency. Other factors include speculation on the oil futures market, increasing risk aversion and market uncertainty from the recent US credit crunch, and geopolitical threats in the Middle East.
Luckily, the effect on the global economy of the recent oil price increases has not been as nasty as the previous two 1970s oil crises. The first oil crisis in 1973 occurred from the Arab embargo on shipping oil to countries that supported Israel in the Yom Kippur War. The second oil crisis in 1979 originated from the Iranian revolution. Economists have not reached a consensus on explanations for this second crisis, but the general idea is that oil-producing countries cut back their production greatly during the period. Both crises were mainly supply-driven, provoking a soaring oil price and leading to global recessions.
Throughout the climb of oil in this decade, global inflation and GDP growth have so far been relatively stable. A number of studies suggest that the increasing resiliency of major economies have improved their ability to absorb recent oil shocks. Several factors have contributed to this flexibility: greater interest in renewable energy leading to a smaller share of oil in the economic system, more efficient western energy industries making them gain a bigger share of global production, more flexible labour markets, as well as a more committed monetary policy of central banks toward maintaining a low and stable inflation.
So given the current benign environment, is a high oil price hurting the Thai economy? I think the impact of the oil price on the economy depends largely on how it affects consumer spending.
My main concern lies in consumers’ purchasing power, and not so much the rising oil price itself. Increases in the price of oil are like a tax increase, affecting mostly low- to middle-income households. Economic growth depends on stronger consumer spending to keep the economy going. If consumers are made poorer (or feel poorer) by higher oil prices and cut back spending, growth forecasts may not be as good as predicted.
Going forward, WTI prices are projected by several research houses to average in the range of $90.50 to $101 a barrel in 2008 and $80 to $92.50 in 2009, provided that there is no further sharp dollar decline and severe geopolitical tensions. Although the oil market seems to be coming down, it will remain at a high level.
The era of cheap oil is over. A new paradigm of thinking about energy is, therefore, essential. We should not be too concerned about short-term fluctuations in oil prices, but focus more on medium- to long-term solutions. Conservation and efficient use of energy are perhaps the best policy choices at hand, but the government should also seriously explore alternative energy options and make decisions.
Despite the ongoing political uncertainty, the energy minister and her team should do all they can to ensure continued energy security for the sustainable growth of Thai society.
Source: www.bangkokpost.com
Tags: fuel costs, price rising