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World economy held to ransom

Times Online: ANALYSIS: World economy held to ransom: What hope is there for global growth when political and economic developments have left power over the oil markets in the hands a few insurgents?

By Mike Verdin

Posted 30 Sept 04

Until now, the only stocks which bizarrely named rebel groups have been associated with have tended to be prefaced by the word “laughing”. The Tooting Popular Front formed the basis of the Citizen Smith comedy series while the People’s Front of Judea starred in Monty Python’s Life of Brian.

The Niger People’s Volunteer Force, however, is quite a different concern. Local Government officials in Nigeria may dismiss the group’s leader, Mujahid Dukobo-Asari, as “a joker”, but few are laughing at the NGVF’s impact on crude oil prices.

For the stocks the force has got a grip are of black gold – the 2.3 million barrels of oil which flows each day from the Niger Delta. While Shell and Agip, the oil companies, have in public dismissed the impact of an NGVF threat to launch an “all-time war against Nigeria” in which foreign citizens will be viewed as justifiable targets, the markets have not, driving the price of crude above $50 a barrel in America last night.

In normal oil market times, 2.3 million barrels of oil would not be significant, equivalent to less than 3 per cent of global demand. But coinciding with violence in Iraq, hurricanes in America, the Yukos crisis in Russia, unrest in Saudi Arabia, the vulnerability reinforces a perception of oil shortages even if global supplies are, just, more than sufficient to cover consumption.

Every drop of crude counts, which means that every Nigerian rebel, Iraqi insurgent or Saudi Arabian terrorist has a chance to influence the market with but the flick of a safety catch or a statement to a local TV station. And through raising oil prices, they threaten to bring the world economy to its knees, the president of Opec, Purnomo Yusigantoro, warned this morning.

“Right now Opec cannot do anything and the high oil price can cause recession,” Mr Yusigantoro said, knowing that even an Opec agreement two weeks ago to increase production has so far failed to cool the market.

So the barrel of NGVF guns aimed between the eyes of Nigerian troops are pointed at the head of global economic welfare, too. How rich the irony that the power over oil apparently sought by the world’s mightiest nation through the invasion of Iraq has trickled instead to any rebel with an AK-47 and an axe to grind.

Not, however, that the world economy has yet to reach the crisis Mr Yusigantoro has outlined. As has been pointed out regualrly, in real terms the oil price remains well below its historic high, even at $50 a barrel. While crude peaked at a little over $41 a barrel in 1980, that spike translates to $80 a barrel at today’s prices.

Furthermore, major industrialised nations have reduced their dependence on oil through expansion into other energy sources and efficiency measures. Japan is reliant on oil for 49.4 per cent of its energy needs, compared with 77.4 per cent in 1974 at the time of the first oil shock. In the UK, energy consumption per unit of GDP is less than half what it was in 1970.

Nonetheless, when National Statistics this morning raised its estimate of UK business investment in the second quarter, heralding a rise in overall economic growth, it appeared historic rather than momentous. The move related to a period before declines in high street sales, manufacturing activity and house prices, when interest rates were expected to reach 5.5 per cent this year, compared with assessments now that they have already peaked. They were linked to a time before abysmal American jobs figures, and when poor Japanese economic figures could rationally be dismissed as one-offs.

Western economies might not be poised to be picked off. But when analysts today – in late September – start saying that there “are already signs of a cold, cold winter”; when the European Union’s Energy commissioner, Loyola de Palacio, says that oil prices will fall after the US elections, against all historical evidence, you know there is panic afoot.

And that the last laugh will be had at the expense of oil consumers.

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