Runaway oil prices--the causes: crude oil prices have more than quadrupled since 2002 and until recently were within a whisper of the magical $100 a barrel mark. What factors are fuelling this remorseless surge and how will African businesses and consumers be affected?

Author:Siddiqi, Moin
Position:View from the City

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 greenback 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...

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