Many people (myself included) dismissed a warning from Wall Street bank Goldman Sachs in 2005 that the oil market was entering a 'super peak' cycle, where $ 105/barrel was possible. That prediction now seems more than likely, as Barclays Capital, the UK investment bank, said: "We're going to get $100 before too long. The factors that have been driving the recent trend are still in place." Adjusting for inflation, oil is edging closer to its 1980 peak, when the price was equivalent to about $100-110 in today's money after the Islamic Revolution in Iran. Back then, costly oil tipped the global economy into a recession and similar fears are resurfacing now. Soaring energy prices make life expensive for consumers and businesses, having a negative 'multiplier-effect' on their spending in other areas. A number of reasons explain the inexorable rally in oil markets over the past five years, chiefly ravenous energy demand led by the BRIC economies (Brazil, Russia, India and China), low spare production capacity (below 3m b/ d), refinery bottlenecks at Western oil consuming nations, militant violence in Nigeria's oil-belt Niger Delta and rebel attacks on oil facilities in Southern Sudan, as well as bad weather in the Gulf of Mexico. Geopolitics, the fear factor and excessive speculation also played a role, as has the weak US dollar - hit by falling interest rates and bearish growth prospects in a wave of credit turmoil. In fact, oil demand has risen in continental Europe, Britain and Japan, as the sinking greenbacks makes oil, which is priced in dollars, cheaper to buy outside the US. Iran's resolve to acquire nuclear power for civilian purposes interpreted - a bit lamely now following the disclosures by the CIA - by the US and Israel as a desire for nuclear weapons, sparked concerns of supply deficit in any future showdown. Hugo Chavez, Venezuelan president, warned: "If the empire [the US] decides to invade Iran, surely oil prices could go as high as $200 a barrel." His views were shared by former Saudi ambassador to America, Prince Turki al-Faisal, who said bilateral military actions on Iran, Opec's second-biggest producer, would make "the whole Gulf (the world's largest oil basin) an inferno of exploding fuel tanks and shoot up the price of oil astronomically." These factors, mainly geopolitical issues, have created a climate of greater uncertainty that is driving the market. One analyst remarked: "We are stepping into an unknown area. Nobody wants to sell, given the fear of a further rise." Spillover risks The world economy so far has shown a strong resilience to more expensive energy - with oil averaging $75 barrel at year-end, up steeply from $31.5 in 2003. The International Monetary Fund (lMF) projects global output growth at a healthy 4.8% in 2008, albeit down from 5.2% in 2007. The main reasons are that industrialised economies today are far less energy intensive. For example, the US's 'oil intensity' (i.e., amount of oil needed for each dollar of output) has fallen to just 13% of its 1970's level. For developing nations, robust global expansion and rising non-fuel commodity prices have offset the impact of spiraling oil prices on many countries' trade balances, whilst the impact on fuel importing countries is softened by a faltering dollar. That said, prolonged three-digit oil prices would derail growth prospects worldwide by raising production costs, while stoking inflation. That, in turn, will cause central banks to hike interest rates. The International Energy Agency (lEA), Western nations' energy watchdog, thinks: "it will hurt the economy definitely the economy of OECD and also developing countries:" The situation is challenging for the latter group where rising fuel plus food prices will put pressure on household budgets and external balances. And, for many non-oil African economies, costly energy will increase their import bill, thereby putting further strains on fiscal positions. Indeed, runaway prices should prompt all countries to moderate their consumption and encourage investments in other energy sources such as bio-fuels and nuclear power, as well as energy-saving measures. Odein Ajumogobia, Nigerian oil minister, pointed out: "We are going down a road we have never been down before;' suggesting that soaring prices will ultimately undermine demand. OPEC's interest lies in moderate prices. At the same time, oil exporters are flush with petrodollar windfalls. The total earnings for 13 OPEC members (four are African) are expected to come in at $658bn and could exceed $760bn in 2008, compared with $IlObn in 1998. But purchasing power is being eroded by the plunging dollar. Mahmoud Ahmadinejad, the Iranian president, put it succincdy: "They (Americans) get our oil and give us a worthless piece of paper. We all know that the US dollar has no economic value”. This view was partially echoed by Abdalla Salem el-Badri, Opec's general-secretary, who said: "If you look at the low dollar, the high cost of producing oil, the high cost of investing, it's really not a bonanza:' No magic solution Physical commercial trade does not support a triple-digit oil price. On balance, factors other than the supply crunch are behind the surge. Rex Tillerson, chief executive of ExxonMobil (world's top oil major by market capitalization), said: "Fundamentals do not support this level of pricing. By fundamentals, I mean supply and demand. As far as I know, no-one is having any trouble getting “crude out there." So, Opec would be justified in claiming "the market is very well supplied. It is totally controlled by speculators who consider oil as a financial asset. ” The credit market turmoil had induced investors to switch to oil and gold from volatile equities. Gold, a traditional inflation hedge, jumped to a 28-year high of $827 a troy ounce, very near its ail-time peak of $850 in 1979. The dollar's shrinking value could account for a $1520 hike in crude prices, reflecting a wave of 'hot money' into oil futures. New agents - hedge funds and institutional investors are betting on black gold, buying options (contracts that give the right to buy at a predetermined price and date) on further dollar weaknesses. lNG, the investment bank, notes that speculative long positions expect crude hitting well above $100 level. According to Petro Strategies, a think-tank in Paris, speculators now account for 33% of trade on the Intercontinental Exchange, a leading market for energy contracts, from a negligible 0.2%1n 2002, whilst commercial buyers represented less than half of oil trades in 2006, down from 82% in 2002. It explained: "Putures markets are disconnected from fundamentals. Opec's strategy is not working and needs to be re-examined." Hence, speculative trading is largely fuelling the market instability. Abdullah al-Attiyah, Qatari oil minister, rightfully believes higher production may not overcome the investment flow switch. "We don't have a magic stick to solve this:" At a recent Abu Dhabi meeting, Opec predictably left daily output unchanged at .27.25m bid until its next gathering on 5 March, arguing that market was "well supplied': True, total OECD forward inventory cover (crude oil and products) was estimated at 53 days of consumption in October 2007, close to a five -year average. The cartel, which produces over two-fifths of global output, maintains speculators (not supply shortfalls) are underpinning "exaggerated prices". In response, a New York based Nera Economic Consultancy wrote: "It's certainly not been demonstrated that there's any kind of speculative impact on prices. It has been demonstrated that demand has not abated and supply has been flat in terms of an (oligopoly) supply source. It's interesting that Opec would be blaming speculators for high prices without really addressing the supply side." Tight market conditions Oil demand will remain fairly robust in 2008 and beyond, supported by brisk economic activity in emerging markets, particularly China and India offsetting subdued energy off-take in Europe, the US and Japan. The lEA projects a rise of 2m b/ d (up from 1.2m b/ din 2007) in world consumption. Whilst the Energy Information Administration (EIA), the statistical arm of the US energy department, reckons prices could trade above $75 a barrel in the coming months as "global oil markets are likely to remain stretched" . A sustained era of expensive oil would enhance the commercial viability of upstream projects thus encouraging oil exporters and industry majors to increase their exploration and development spending. Recently, OPEC unveiled a programme to invest some $150bn over the next five years into 120 projects, with the aim of boosting the cartel's overall production capacity by more than 5M b/ d. In the medium-term, prices should fall as extra supply, including from unconventional sources, such as oil sands and coal to oil, as well as from marginal North Sea and Gulf of Mexico fields, coupled with massive investment in offshore West Africa, mitigates the risk of supply crunch. But the era of cheap oil is over. Only a global recession can bring prices down. Source: Moin Siddiqi, culled from Africa Busioness Magazine, 2008.