Oil prices have risen over fifty percent in the past several months, with the present barrel trading at US$115.
A major component of this increase in price has come in recent weeks as tensions in the Middle East have increased.
Oil is an important resource for just about everything and its supply and affordability is often a key driver of economic conditions. Risks are currently posed to the delicate recovery path the world is on, inflation expectations, as well as the consumer implications from increasing petrol costs.
Global energy consumption has nearly doubled since the 1973 oil crisis. In terms of the energy mix, oil still provides about a third of total primary energy consumption. Even with the implications for global warming and the environment, coal still represents almost 30% of total energy use. Natural gas follows, supplying about a quarter of the world’s energy demands, and the contributions from hydropower and nuclear energy are still relatively small at this stage.
The USA accounts for over 20% of world consumption, remaining the world’s largest consumer. China is the world’s second largest user, having overtaken Japan a few years back.
Looking at the production side, the Middle East region contributes approximately 30% of the world’s oil, with Saudi Arabia the largest producer. Over 20% comes from Europe, another 16% from North America and the remainder from Africa, South America and Asia.
The US produces a little less than 10% of the world’s supply, so is very much a net consumer. It does, however, have strategic oil reserves, which it has only used a handful of times, the last being in 2005 after Hurricane Katrina.
With hundreds of different grades of crude oil available internationally (the various grades are mainly a reflection of different sulphur content and gravity) the overall trend for oil prices has been very much a rising one.
In our view most of the recent rises in oil prices are because of a strengthening global economy. When economies are strong consumers begin spending and manufacturing operations step up production, which increases the demand for fuel, which sees oil prices rise. Generally, stable oil prices are a sign of a healthy economic outlook.
However at present, a reasonable proportion of the current price spike can be attributed to concerns about possible disruptions to production in the Middle East and distribution to the rest of the world.
This price spike is worrisome for consumers whom see the impact of such prices at the petrol pump, as well as experiencing the flow on effects of increasing prices as companies look to pass on their increased fuel costs.
For consumers, these increases come at an unfortunate time, given that our currency has fallen in the wake of the Canterbury earthquakes and as interest rates look set to remain at low levels for some time. As an exporter we often cheer a fall in the exchange rate, although when it comes to paying for goods that we import, such as petrol, a weakening currency is somewhat overrated.
