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  • THE GLOBAL RECESSION AND ENERGY MARKETS

    Papers,
    27 November 2009

    The business cycle, the global crisis and oil markets are currently the three most popular topics of discussion in academia, the media and among politicians. The world economy is influenced by a huge number of subjective factors, country policies and alliances, and national and international energy companies. But the objective economy, primarily energy and finance, remains at the core. We must study these sectors, otherwise science will fall into the hands of amateurs, professional doomsayers and followers of conspiracy theories. The media brings us many new theories and revelations that are brilliant in their simplicity. Hope is the mother of invention, and amidst the crisis they cannot be disproved. But in two or three years 99% of this verbal chaff will have been blown away and only serious analytical work will remain.

    Given the immensity of the topic, several key points should be highlighted.

    • The global economic boom of 2003-2008 overstressed energy markets given the insufficient levels of investment in energy in the preceding two decades.
    • Supply and demand are still the main dynamic of markets. The effect of financial speculation was important in the particular conditions of August 2007-August 2008, but it did not overturn the laws of the market.
    • During the peak of the crisis in the fall of 2008, the drop in demand for oil was so much steeper than the natural possibilities of reducing supply that only OPEC, which has repeatedly been pronounced dead, could play an important stabilizing role on the oil market. At this stage of the recession, an increase from $40 to $60 per barrel can be considered a success.
    • The long-term oil price must allow for production to recover to levels needed to stabilize markets in the long-term and to prevent wild fluctuations; this would be a price of $70-$90 <$60-$80? – in table 2> per barrel. Consequently, a “fair price” is not mysticism, but the price of supply renewal, underpinned by a balance of participants’ interests. The outcome of the G8 summit in L’Aquila in July 2009 shows that the desire to avoid major fluctuations and ensure the stable future development of world energy has penetrated political circles (and no one complained about OPEC).

    The Institute for Energy and Finance’s work for the Energy Ministry showed long before the crisis that the world economy was growing too fast during the boom from 2003 to the first half of 2008, while investment in energy capacity was not keeping up after 15 years of low investment at prices of $20 per barrel. The structure of global growth shifted from developed to developing countries, with their more energy-intensive industries and energy-intensive private consumption with the emergence of a new middle class. This applies not only to China and India, but also to Latin America, Middle East and other regions. The growth of primary energy consumption in the world exceeded 2.5-3% per year.

    THE GLOBAL RECESSION AND ENERGY MARKETS (pdf)

     


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