Falling oil prices mean this could be shortest crisis ever

Well if that’s all we see, this could be the shortest oil crisis ever. After a week of skyrocketing prices, crude oil fell by $5 a barrel Friday on the New York market, encouraging investors to jump back into stock markets and brightening the outlook for continued economic recovery.

Of course nobody really knows where we go from here. There’s a chance the demand for democracy in North Africa and the Middle East could spread to big oil producers such as Saudi Arabia or Iran. That could bring a large, long-lasting crisis.

But the betting yesterday was increasingly that we’ll avoid anything so extreme. It’s possible oil markets could settle down to something close to normal within months.

“We are not seeing a global oil shock,” says an emphatic Craig Alexander, chief economist at the TD Bank. “What we are seeing is markets fretting about one occurring.”

The only significant oil producer to have been affected so far is Libya, which produces less than two per cent of the world’s oil and where citizens’ committees in key oil-producing regions are setting up informal security arrangements to keep oil infrastructure safe from vandalism.

As well, of course, there’s the fact that both Europe and the United States are very well supplied with oil stockpiles at the moment and that Saudi Arabia and other major producers could crank up production by an estimated five million barrels a day, or roughly three times as much as Libya has been exporting.

In other words, even if there were a real global shortage of oil, which is not the case today, we have a cushion that could let industrial nations ride it out for months.

Of course, if it lasted longer than months, this would merely delay the pain.

Alexander, like other analysts, is very careful not to predict where today’s political unrest will end.

But at the moment, there’s no evidence of disruption outside of Libya.

So, taking today’s situation as our basic scenario, where do we go from here?

Well, today’s oil prices are about 20 per cent higher than prices one year ago, Alexander calculates (only partly because of Libya; also because demand has grown during the economic recovery) so we’re already feeling a bit of economic drag.

If today’s price around $100 remains in place for a long time, it will cut economic growth by about one fifth of a percentage point – “not materially,” in Alexander’s opinion – in the rich world’s oil-importing countries.

A written report by Alexander is on the TD Bank website; just Google “TD Economics” and look under Special Reports.

How about Canada?

We don’t suffer, since we’re an oil exporter. Some analysts think we even benefit a bit while others think we don’t feel much effect at all.

But short of a huge jump that clobbers Canada by triggering another U.S. recession, this country basically breaks even from pricier oil.

Oil-exporting provinces benefit, but a weaker U.S. economy hurts exports from provinces like Quebec and Ontario.

How big a jump could cause a significant U.S. slowdown?

The latest estimate from IHS Global Insight, an international economics consultancy based in Boston, is that it would probably require oil to shoot at least $20 above the current price.

At $120 for West Texas Intermediate, the American benchmark for crude oil, gas in the U.S. would jump to $4 a gallon from a current U.S. national average of $3.29, damaging both pocketbooks and consumer confidence, calculates Nigel Gault, chief U.S. economist at IHS.

“At that point, the damage to growth would start shifting from an irritant to something worse,” he said in a report to clients.

At Deutsche Bank, economist Joseph Lavorgna thinks the danger threshold for the U.S. economy is probably a bit higher, noting that the stress from higher prices is somewhat offset by today’s very low interest rates.

But above $125 a barrel for U.S. oil, he said in a bulletin to clients yesterday, he’d have to “meaningfully reduce” the bank’s growth outlook.

On the other hand, it’s at least plausible that prices could diminish gradually if the international supply of crude doesn’t suffer from any new shock.

If there’s no new supply shock, Alexander at the TD Bank expects oil to fall quickly to somewhere around $85 or $90 a barrel.

He can’t predict political turmoil, of course, but this is still the scenario he finds most plausible.

(Source: http://www.montrealgazette.com/business/Falling+prices+mean+this+could+shortest+crisis+ever/4350722/story.html)