The crude oil threat

However bad a situation may be, it can, of course, always get worse. The rather precarious economic recovery of some industrialized countries, periodically plagued by crises of financial solvency, now faces the additional threat of a sustained rise in the price of crude oil, which last week already stood at $90 a barrel.

In other words, the per-barrel price has doubled in the space of a year and a half, and the tendency remains an upward one. The OPEC cartel's undisguised aim is to situate the price between $90 and $100 a barrel, an objective that is fairly easy to attain. It will suffice if demand during the next few months grows at a rate higher than 1.4 million barrels daily for the price to rise significantly. As demand is now rising at more than this threshold rate, it is very likely that the first months of 2011 will see the confirmation of a price rise that cannot help but seriously cramp the timid economic recovery of the wealthier countries.

The long-term upward trend in the price of crude oil is to be explained in terms of the gradual, but continual and predictable, growth of demand and the relatively tight control of supply; and as a secondary effect of the financial crisis.

When money is withdrawn from traditional activities, the resulting surplus of liquidity is diverted to the area of raw materials, and by far the most relevant of these is petroleum. This exacerbates the natural tendency toward rising oil prices, and the calculation that has to be considered, in very rough terms, is that a rise of $10 in the average per-barrel price is equivalent to a cutback of between 1.5 and two tenths of a percentage point in the rate of world growth.

Thus the already sluggish rate of world economic growth, which finds itself still deep in convalescence from a world financial crisis, will have to shoulder another heavy burden. This negative tendency will be confirmed if OPEC decides not to raise production once prices equal or superior to $100 are attained, and supposing that the continuing injection of liquidity into the petroleum market does not cease.

The immediate cost of the rise of crude oil prices is transferred directly to the consumers in the form of increases in the prices of gasoline, fuel oil and other related products. The consumers, to whom the intermediary companies never deign to explain anything, now face a price of super-grade gasoline that hovers around 1.2 euros per liter- almost the same as in April 2008, when the per-barrel cost stood at $140. The explanation of this disproportionate rise lies in a sharp increase of fiscal pressure (VAT and special taxes) on a range of oil products, the shift in the dollar-euro exchange rate, and an increase in the profit margins of the intermediaries selling the products, which has also been a significant factor.