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Decline in oil prices hints at recession

Update: September, 14/2012 - 10:40

by Chu Lan Huong

(VNS)In the past six months, global oil prices have fallen remarkably, easing the restraints that high energy prices put on the economic growth of petroleum-importing countries.

However, it's a fine line: if the price of crude decreases too sharply, it can be a sign of recession.

Total spending by the EU, the US and Japan on oil imports was about US$1 trillion in 2011, about as much as in 2008, when the world fell into recession. The International Energy Agency (IEA) has also predicted that weak economic growth and high oil prices were likely to contain global oil demand through this year and next.

Debt crises in the eurozone and the US have caused a slowdown in production and a reduction in energy demand.

As the US government faces increasing pressures to cut its budget deficit, the country's oil consumption in the first four month of the year fell by 3.2 per cent from the same period last year.

"The pace of oil demand growth is expected to remain relatively steady over the next 18 months, with annual gains of just 800,000 barrels per day in both 2012 and 2013," the IEA has written in its latest Oil Market Report.

The modest growth rate reflects the combined effects of sluggish global economic activity, historically elevated oil prices and global improvements in energy efficiency, the report said. Global economic growth was expected to slow to merely 3.3 per cent this year and remain at a sluggish 3.6 per cent next year.

With Brent futures indicating that oil prices would remain above $100 in 2012 before dipping below $99 in 2013, the persistently high price has given consumers an incentive to cut consumption, the report added.

But, on Wednesday, oil prices were only poking their heads above $98 per barrel on the New York Mercantile Exchange, and Brent crude gained 56 cents to $115.33 per barrel. Those gains were immediately erased after the US government announced that crude inventories had increased last week.

Traders are now looking ahead to the US Federal Reserve wrapping up a two-day policy meeting. There is broad speculation that Fed chairman Ben Bernanke will unveil a bond-buying programme or take other steps designed to stimulate the US economy, which could increase demand for energy.

Since hitting a low of $77.69 per barrel in late June, oil has risen about $20 per barrel on expectations that the US, Europe and China would do more to help their economies, the IEA said.

But prices have stayed within a narrow range recently with traders unconvinced that stimulus measures announced in Europe or expected in the US would be enough to bolster the global economy, Traditional Energy oil analyst Gene McGillian told the website Boston.com.

‘"The market is starting to signal that unless we see something verifiable that the global economy is improving, further advances are going to be kind of tough to come by," McGillian said.

Political tensions in the Middle East, from the tensions between Iran and the west over Iran's controversial nuclear programme, to this week's events in Libya and Egypt, cast further doubts over the future. Iranian oil output had already been hurt by tougher sanctions imposed by the EU, with August production down 50,000bpd to 2.85 million bpd, or about 650,000 barrels below levels at the end of 2011, said the IEA.

Tensions between Iran and Israel are increasing day by day. The risk of another war in the region grows, something that would immediately push crude oil prices into three-digit figures.

Syria, Iraq, Yemen and Sudan all remain hotspots, and demand from China, South Korea and India remain unpredictable. According to TradingToday.com, China and India are the major players when is comes to the world's growing economies.

Meanwhile, global oil supplies are finite. Many developed countries have almost completely depleted their oil reserves. Mexico announced in 2004 that their largest oil field – and the second fastest producing field in the world – Cantarell Field, has seen a steep decline in production. In 2002, Cantarell produced 2.1 million bpd. By 2008, this figure was down to only 1 million bpd.

The world's largest oil field is Ghawar field in Saudi Arabia. According to the Saudi government, the field has 75-83 billion barrels of oil and should be able to increase production in the future.

The field considered to be second largest is Kuwait's Burgan Field, with 66-72 billion barrels. In 2005, Burgan began decreasing production and estimated its lifespan as 30-40 more years.

Tar sands and other new sources are more costly to exploit. Canada's Athabasca Oil Sands hold an estimated 1.6 trillion barrels of crude, but the extraction process is very expensive and difficult. Nevertheless, this process will certainly be refined, and, if oil prices continue to rise, the Athabasca Oil Sands will become a major supplier of gasoline to North America. — VNS

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