By: Dr. Mike Campbell
Oil is a crucial commodity for the global economy. It can be refined to make a huge array of products from lubricants to fuels and from plastics to pharmaceuticals. The price for oil can be seen as a barometer for the outlook for the global economy – in times of recession, demand falls and the price declines. Conversely, increased economic output increases demand and the price for crude rises.
However, the price of the commodity responds to other factors including natural catastrophes, oil cartel pressures, political instability and fear. It is these more human factors which are driving the price of oil to levels not seen since 2008.
Brent crude hit $119.76 before falling back to $116.8 in yesterday’s trading. This level was last seen in August 2008. The fears driving the market are due to uncertainties within the Middle East region.
In the end, the overthrow of the regime of President Mubarak in Egypt was a relatively bloodless affair. However, concerns that geopolitical factors would close the Suez Canal to oil tankers were enough to push crude higher. In the event, the transport of oil through the canal has not been hindered, but other factors have kept fear alive and prices high.
Libya is the world’s twelfth largest oil producer with much of its output destined for Europe. Current waves of popular protest against the regime of Colonel Gadaffi have been met with violence leading to fears of an escalation and consequent disruption to the oil supply. This, of course, has caused the price of crude to rise on global commodity markets.
Higher oil prices lead to higher fuel, transport and raw material costs in many sectors. This is causing some leading stock exchanges to fall since higher oil prices will tend to weaken the still fragile global recovery.