Oil US$200/barrel? A possibility say Opec leaders

US$200 FOR A BARREL OF OIL?
It's a possibility if global political climate is not stable, say Opec leaders
Christie Loh, Today Online 19 Nov 07;

WHERE two or more economists are gathered, there will be the world's biggest worries of the day.

Oil was dinner-table talk for a group of economic pundits in Singapore some days ago. Recalling the intense conversation with counterparts who flew in from overseas, United Overseas Bank economist Jimmy Koh told Today: "We really don't know where the breaking point is."

Since the start of the year, oil prices have surged from below US$60 a barrel to come dangerously close to the psychological US$100 mark.

Despite the rise — which has shocked analysts and pushed up prices of consumer goods such as petrol, electricity and food — the world has not fallen into any predictable economic recession.

Now Mr Koh and friends have more fodder for thought: How about US$200 a barrel?

That scary number came up over the weekend at a meeting in Saudi Arabia among the members of the Organisation of Petroleum Exporting Countries (Opec).

"If the United States is mad enough to invade Iran or make an aggression against Venezuela again, the price of oil will not be US$100 but maybe US$200," Venezuelan President Hugo Chavez had declared, referring to US threats against his ally, Iran, because of the Islamic republic's disputed nuclear programme.

What are the chances of the chilling prediction materialising? Analysts say it depends on the factors behind the surge.

"If this is very much demand-driven, it'll be okay," said Mr Koh. This has been the case thus far, as oil prices climbed due to increasingly energy-hungry countries such as emerging China.

The good thing about demand being the driver is the "self-adjusting mechanism", whereby "the oil price naturally corrects itself when demand starts to cream off", Mr Koh explained.

Mr Chavez's rhetoric lost some of its edge when Opec leaders stressed the importance of world peace for the stability of oil prices, in its final summit statement yesterday.

On Dec 5, Opec will provide a further clue on where oil prices could head during its meeting to discuss production policy. If they churn out more barrels, consumers may see some relief.

Still, the worry is if a supply shock occurs.

In 1973, Opec — producer of 40 per cent of the world's crude oil — refused to sell to nations that supported Israel in the Arab-Israeli War. As a result, oil prices quadrupled to about US$12 a barrel by 1974, stock investors lost billions and living costs rocketed.

At US$100 today, oil is actually lower than prices in the 1980s after considering inflation. According to an analysis by Cambridge Energy Research Associates, oil's previous peak was in April 1980 at US$39.50 a barrel.

This is equivalent to US$99.04 today, after factoring out inflation and the US dollar depreciation, Cambridge Energy chairman Daniel Yergin was quoted in a report by The Dallas Morning News.