Friday, November 21, 2008
Similarities to Dark Days Seen in Oil
As crude slips below $50 a barrel, the dark days of the early 1980s are haunting the oil market. Oil Prices May Fall Further 2:50 Sean Brodrick, natural resources analyst at Moneyandmarkets.com, explains why more bad economic news could depress oil prices further. He also discusses what traders can expect from OPEC's upcoming meeting. Benchmark crude on Thursday ended at $49.62 a barrel on the New York Mercantile Exchange, a level unseen since May 2005. But it is the early 1980s that offer a more-useful reference point. Then the U.S. entered a deep recession and world oil demand declined four years running on a conservation push and after spiking prices. "We could have negative oil-demand growth for four years in a row again," said Philip Verleger, an independent energy economist who served in the Carter administration. "This is a really bad recession." While President Jimmy Carter in the late '70s pushed for conservation efforts, President-elect Barack Obama is advocating strict controls on carbon-dioxide emissions, which would force greater efficiency in the way the U.S. burns oil. To be sure, there are big differences. That era's price spike followed the 1979 Iranian revolution and the start of the Iran-Iraq war. The Nymex crude-futures market was formed only in 1983. But the basic similarity to the earlier period is that the economic outlook is decidedly stark. The International Energy Agency estimates that world oil use is down 0.6% in the final quarter of 2008 from a year before and sees demand roughly flat for the year. Says Antoine Halff, deputy head of research at futures brokerage Newedge USA: "Demand destruction today rivals that caused by the oil shocks of the 1970s, and may prove to be, to an even greater extent, a game changer."