If ongoing political turmoil in North Africa and the Middle East pushes crude oil prices to $120 per barrel or more permanently, the global recovery from the worst recession since the 1930s would be hampered, according to a top economist. The unrest that has swept from Tunisia to Yemen, Algeria, Bahrain and Iran is fanning the advance of oil prices, which have surpassed $96 a barrel in New York The global economy may tip back into recession if oil prices reach $120 because of unrest in the Middle East and North Africa, according to Morgan Stanley.
Libya’s escalating violence represents the biggest threat to global oil supplies since the invasion of Iraq eight years ago as political unrest sweeping the Middle East centers on a member of the Organization of Petroleum Exporting Countries, or OPEC.
Oil prices jumped to the highest in more than two years in New York as Libya’s violent uprising threatened to disrupt exports from Africa’s third-biggest supplier and spread to other crude-producing nations in the Middle East. Crude for April delivery gained as much as 0.7 percent to $96.08 a barrel in New York. Oil has rallied 9.2 percent since Jan. 24, the day before the first anti-government protests erupted in Egypt.
“If you go above $120 on a sustainable basis, you will have a meaningful shortfall in global growth relative to what the current consensus expects,” Jonathan Garner, Morgan Stanley’s chief Asia and emerging-market strategist, said in a Bloomberg interview in Hong Kong.
Garner joins economists at Mirae Asset Securities in saying another jump in oil prices could stall global growth.
Political unrest that has swept from Tunisia to Yemen, Algeria, Bahrain and Iran in the past four weeks is fanning oil’s advance at a time when the world economy is emerging from the deepest recession in more than 50 years.
Lipsky still optimistic
The global economy can withstand the surge in oil prices so long as the increase proves short-lived, said the International Monetary Fund’s No. 2 official.
“It’s unlikely it would make a substantial change in the global economic outlook,” John Lipsky, the IMF’s first deputy managing director, told Bloomberg.
“You’ve got to be concerned, particularly because of the effect on the oil price,” Bill Belchere, global chief economist at Mirae, said Feb. 21 in an interview with Bloomberg. “If you have the oil price spike up another $20 to $30, you can re-enter another global recession again.”
“There are some similarities in the current situation with the lead-up to the last Gulf War in Iraq in the sense the oil market is pricing in the potential for outages in crude supply,” said Harry Tchilinguirian, the London-based head of commodity-markets strategy at BNP Paribas. “The difference today is that there is no clear visibility on the possible duration of events in the Middle East or their geographic scope.”
Meanwhile, a possible halt in Libyan oil exports, while “unlikely,” would have a “profound” impact on the tanker market because ships sourcing the additional fuel from the Persian Gulf would have to travel further, Pareto Securities said in a report.
“Given a prolonged internal conflict this could potentially cause severe disruption to production, or possibly trigger an oil embargo on the current regime,” Pareto said in the report. “In such a scenario, which we deem unlikely, the lost oil would most probably have to be sourced from the Arabian Gulf.”
While unrest in Egypt prompted concern oil tanker movements through the Suez Canal would be disrupted, its own output is less than half of Libya’s, according to statistics. Libya is the ninth-largest producer in 12-nation OPEC, exporting most of its crude and fuels across the Mediterranean to Europe. The nation pumps about 3.3 percent of world output and has the largest reserves in Africa.
Saudi Arabia to the rescue
“The unrest will hold the oil price high into the second quarter, Brent will stay above $100 in the coming weeks,” said Axel Herlinghaus, a senior commodities analyst at DZ Bank in Frankfurt. “If we lose Libyan production that would be a big blow. If that happened, Saudi Arabia would probably step in to increase production.”
Political tension in North Africa and the Middle East is adding about $10 a barrel to the price of crude, Angolan Oil Minister Jose Maria Botelho de Vasconcelos said in Riyadh Tuesday. Angola would like to see Brent prices at $80 to $90, he said. Nigeria, Algeria and Angola are all OPEC members.
Brent may rise to $110 because of the unrest, said Sintje Diek, an analyst at HSH Nordbank in Hamburg. “We have some real oil production there, which is important for Europe and for Italy and also for Germany.”
U.S. Deputy Energy Secretary Daniel Poneman, speaking to reporters in the Saudi capital Riyadh Tuesday, said all producers need to respond to the need for more oil, to help curb price increases that may hamper the global economic recovery.
“With anecdotal indications of very strong demand for crude for risk-management purposes, OPEC faces a dilemma,” Lawrence Eagles, head of commodities research at JPMorgan Chase, said in a research note. “If it pumps oil into the market, when the security situation improves, higher inventories will reduce the producer group’s ability to manage market conditions.”