The chief economist of the World Bank predicted in an interview published on Saturday that oil prices will return in a matter of months to a stable level of about $30 a barrel after hitting record highs last week of nearly $50.
Although prices closed down on Friday, many traders predicted that the volatile hikes will continue, but the World Bank’s Francois Bourguignon said that, once current uncertainties have dissipated, ”I think we will return to a balanced price in a few months’ time”.
Bourguignon told the Spanish economic newspaper Cinco Dias that market forces will eventually stabilise the price. For example, producers will exploit wells that are not profitable at $30 a barrel, but might be at a higher price. But then an increase of supplies will have the effect of driving the price down again.
He said there are undoubtedly some objective causes for the price rises, such as China’s strong growth and economic recovery in the United States and Japan.
However, he said the price rise is also fuelled by speculation and uncertainties over the fate of the Yukos oil conglomerate in Russia or the referendum in Venezuela. He discounted the crisis in Iraq because it had not been an important oil producer before the US-led occupation last year.
The International Energy Agency said earlier this month that the market is in the grip of ”irrational exuberance” even though ”the market is tight, production and infrastructure capacity is less than desired and uncertainties continue to weigh on the market”.
However, the chronic volatility in Iraq in the face of attacks on installations by insurgents has contributed to a ”security premium” of up to $15 a barrel, market experts in London said.
Much of this nervousness is based on sentiment rather than fact.
For example, a fire on Friday in the northern oil complex of Kirkuk sent prices soaring even though the terminal was already out of action.
Asked what would happen if oil prices remained high for several years, Bourguignon said this could knock a couple of tenths of 1% off world economic growth each year, ”but I do not think this will happen, because the market tends towards a balance”.
He said developing countries would be the hardest hit by a prolonged rise, with the exception of countries such as China and India that have a high rate of economic growth. Europe has been cushioned against high prices by the strength of the euro against the dollar, in which oil is denominated.
Bourguignon said it should not be necessary to raise interest rates within the euro zone because ”in Europe, the economic situation is not yet good, and there does not appear to be a risk of inflation to justify a rate increase”.
The director general of the International Monetary Fund, Rodriguez Rato, said in an interview published in the Barcelona daily El Periodico on Friday that the world economy is ”in a phase of solid and generalised growth” of about 4,6% a year.
He said the increase in demand means that new energy supplies have to be developed — current production by the members of the Organisation of Petroleum Exporting Countries (Opec) is nearing an all-time high of 30-million barrels a day. But Rato attributed the sudden rise in oil prices mainly to uncertainty and speculation rather than to pressure on supplies. — Sapa-AFP