What if oil hits the $250 mark?

08:50, June 17, 2008

At $250 a barrel for crude oil, food prices double. The US, Japan and Europe plunge into deep recession. Companies go bankrupt. Sport-utility vehicle sales dry up as gasoline tops $7 a gallon.

The scenario may not be unimaginable. Alexei Miller, chief executive officer of OAO Gazprom, the world's biggest natural-gas company, said last week that crude will climb to $250 a barrel in the "foreseeable future". Prices may reach that level only after a war or attack on major oil installations, says Jeff Spittel, an analyst at Natixis Bleichroeder Inc in New York.

While executives, elected leaders and economists disagree on the probability of Miller's vision, there is consensus that the price would jolt everyday life.

"It would be a disaster for all the oil-importing countries," says James Woolsey, vice-president of consultant Booz Allen & Hamilton Inc in McLean, Virginia.

Some investors are already betting on Miller's forecast. At least 3,008 options contracts have been purchased giving holders the right to buy oil at $250 a barrel in December, data compiled by Bloomberg show. The options closed at 64 cents on June 13.

Rising oil costs have been responsible for a third of global food inflation since 2004, according to London-based research firm New Energy Finance.

"At $7-a-gallon gasoline, you're probably looking at food prices almost double," says Peter Beutel, president of energy consultant Cameron Hanover Inc in New Canaan, Connecticut.

'Massive shutdown'

Goldman Sachs Group Inc and Morgan Stanley forecast the cost of oil may reach $150 in the next few months.

At $250, "there would be a massive shutdown of companies", says Carlos Mattei, procurement vice-president for glassmaker Vitro SAB in Monterrey, Mexico. "Many of these small companies have to choose between paying the gas bill or payroll."

Still, slowing demand may curb prices. The International Energy Agency, an adviser to 27 oil-consuming nations, last week cut its forecast of world oil use for a fifth month as record costs dented consumption. The US Energy Information Administration expects prices will drop to $120 by December 2009.

"Over a decade or more, after you adjust for inflation, if the price doubled, we would expect demand to fall by 30 percent," says Douglas MacIntyre, the agency's senior oil market analyst. US oil consumption fell 5.7 percent from 1973 to 1975 as the Arab oil embargo led to import shortages.

Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, says the firm's economic models break down if the price of oil goes over $200 a barrel.

"The US goes into deep recession, as does most of Europe and Japan, and that takes much of the developing economies with it," he says. "I don't see how we get to $250 because the economy is broken long before that, and demand falls and that causes prices to fall."

Crude oil rose to a record $139.89 a barrel in New York yesterday as a weaker dollar bolstered the appeal of commodities as a hedge, and a fire cut North Sea output.

The US currency fell as much as 0.8 percent against the euro, making commodity purchases cheaper to foreign investors. StatoilHydro ASA's 150,000 barrel-a-day Oseberg oil and gas field off the Norwegian coast was shut after a fire broke out in a high-voltage room on a platform yesterday.

Crude oil for July delivery rose $4.10, or 3 percent, to $138.96 a barrel at 9:06 am on the New York Mercantile Exchange. Futures reached the previous record of $139.12 a barrel on June 6. Brent crude oil for August settlement climbed $3.40, or 2.5 percent, to $138.51 a barrel on London's ICE Futures Europe exchange.

Source:China Daily/Agencies

|About Peopledaily.com.cn | Advertise on site | Contact us | Site map | Job offer|
Copyright by people's Daily Online,all rights reserved