During the past few months, the unrest in North Africa and the Middle East has created a great deal of uncertainty. And even though the supply of oil has not been reduced, the price of oil has risen rapidly.
Asset prices are partially a function of risk, and oil is no exception. The spreading unrest in the Middle East and North Africa has increased the risk that oil supplies will be interrupted, meaning the risk premium on oil has risen and this has driven both oil prices and oil price volatility higher.
Unfortunately, higher prices and volatility can be expected to stay around as long as the unrest does.
However, this doesn't mean oil prices will rise far enough to stall the economic recovery. In fact, economists believe the price of a barrel of oil would likely have to go well above $125 per barrel for a sustained period to endanger the recovery.
One factor working in our favor is that the OPEC nations are acutely aware of the inextricable link between their oil-based economies and the global economy. When oil prices bottomed out at $30 per barrel during the 2008-09 global recession, Middle East economies suffered. So they recognize it's in their best interest for the global economy to not slip back into a recession, especially during this time of heightened unrest in the region. In fact, the Saudis and other OPEC nations have already signaled their intention to increase oil production should prices reach levels that threaten the global economy.
A second factor working in our favor is that today's domestic economy is far different from the one that struggled through the oil shocks of the 1970s. Since then, the amount of energy required to produce $1 of GDP has been cut in half. This is the result of several factors, including the economy becoming more service oriented — and therefore less energy dependent — over time, and the increased energy efficiency of manufacturing that remains in the U.S.
A third factor helping lessen the strain of higher oil prices is that the price of natural gas has remained low, in spite of a historical penchant for moving in tandem with oil. In fact, during the past three years natural gas prices have fallen 50 percent while oil prices have more than doubled. This was made possible by a dramatic increase in domestic natural gas production, which triggered a dramatic decline in gas imports and led to a worldwide glut of natural gas among exporting nations like Russia and Iran.
Behind the increase in domestic natural gas production is a new, technology called hydraulic fracturing that allows drillers to tap into abundant domestic natural gas reserves that were once locked up in vast, inaccessible shale beds. With these reserves now unlocked, estimates of recoverable natural gas in the U.S. are as high as 2,500 trillion cubic feet, or enough to last the country more than 100 years.
One big advantage of natural gas is that it can be used as a substitute for imported oil. For example, gas can be used to heat homes, generate electricity, and even power trucks and buses. Residents of the northeastern United States who long have been reliant on oil-burning furnaces to warm their homes, schools and businesses, are clamoring to convert to cheaper natural gas heat.
So are higher oil prices something to fear? In the short run, there is no doubt higher oil prices will cause some pain at the pump. But because of OPEC's dependency on a growing global economy, increased conservation and access to alternative energy sources like wind, solar, and natural gas, we are less reliant on oil today than we have been in the past. And in the longer term, higher oil prices will only accelerate the move toward these alternatives.
Source: http://www.reflector.com
Asset prices are partially a function of risk, and oil is no exception. The spreading unrest in the Middle East and North Africa has increased the risk that oil supplies will be interrupted, meaning the risk premium on oil has risen and this has driven both oil prices and oil price volatility higher.
Unfortunately, higher prices and volatility can be expected to stay around as long as the unrest does.
However, this doesn't mean oil prices will rise far enough to stall the economic recovery. In fact, economists believe the price of a barrel of oil would likely have to go well above $125 per barrel for a sustained period to endanger the recovery.
One factor working in our favor is that the OPEC nations are acutely aware of the inextricable link between their oil-based economies and the global economy. When oil prices bottomed out at $30 per barrel during the 2008-09 global recession, Middle East economies suffered. So they recognize it's in their best interest for the global economy to not slip back into a recession, especially during this time of heightened unrest in the region. In fact, the Saudis and other OPEC nations have already signaled their intention to increase oil production should prices reach levels that threaten the global economy.
A second factor working in our favor is that today's domestic economy is far different from the one that struggled through the oil shocks of the 1970s. Since then, the amount of energy required to produce $1 of GDP has been cut in half. This is the result of several factors, including the economy becoming more service oriented — and therefore less energy dependent — over time, and the increased energy efficiency of manufacturing that remains in the U.S.
A third factor helping lessen the strain of higher oil prices is that the price of natural gas has remained low, in spite of a historical penchant for moving in tandem with oil. In fact, during the past three years natural gas prices have fallen 50 percent while oil prices have more than doubled. This was made possible by a dramatic increase in domestic natural gas production, which triggered a dramatic decline in gas imports and led to a worldwide glut of natural gas among exporting nations like Russia and Iran.
Behind the increase in domestic natural gas production is a new, technology called hydraulic fracturing that allows drillers to tap into abundant domestic natural gas reserves that were once locked up in vast, inaccessible shale beds. With these reserves now unlocked, estimates of recoverable natural gas in the U.S. are as high as 2,500 trillion cubic feet, or enough to last the country more than 100 years.
One big advantage of natural gas is that it can be used as a substitute for imported oil. For example, gas can be used to heat homes, generate electricity, and even power trucks and buses. Residents of the northeastern United States who long have been reliant on oil-burning furnaces to warm their homes, schools and businesses, are clamoring to convert to cheaper natural gas heat.
So are higher oil prices something to fear? In the short run, there is no doubt higher oil prices will cause some pain at the pump. But because of OPEC's dependency on a growing global economy, increased conservation and access to alternative energy sources like wind, solar, and natural gas, we are less reliant on oil today than we have been in the past. And in the longer term, higher oil prices will only accelerate the move toward these alternatives.
Source: http://www.reflector.com
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