DAVOS, Switzerland — Despite the slowdown in the global economy, high crude oil prices are expected to persist this year, driven by supply shortfalls, brisk demand in dynamic Asian emerging nations and geopolitical concerns.
This story first appeared in the February 19, 2008 issue of WWD. Subscribe Today.
Top executives and experts said the continued high cost of oil is also expected to impact adversely on synthetic fibers, which are sensitive to the price of petroleum. Spiraling oil prices have also pushed freight rates sharply upward and have led many companies to revisit the proximity-to-market doctrine and where they source their supplies, including textile and apparel firms.
Senior Chinese officials have recently sounded the alarm that high energy and food prices are largely responsible for the increase in that country’s inflation and calls by Chinese workers for sharp wage increases, which could put the top apparel manufacturing country at a competitive disadvantage to lower-cost producers.
“I think that on the energy side, I see relatively high prices for some time to come because we are seeing a structural imbalance between the supply and demand on the energy side,” said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, in an interview at last month’s World Economic Forum meeting here.
Gurria said, “There are circumstances that suggest there are imbalances in the supply and demand equation, which is not just a speculative bubble, it’s not just people trying to guess. There is a stronger pull on the demand and supply has not responded at the same speed.”
Nobuo Tanaka, executive director of the International Energy Agency, said in an interview, “The current level of [oil] inventory in the consuming countries is very low. It’s the lowest in the five-year average and at the same time the spare capacity in the producing countries is also very low.”
Tanaka, who heads the agency consisting of 27 “rich” countries, including the U.S., said, “This creates very much volatility in the markets.” He said oil-producing countries can do more and added that “at the same time, consuming countries can do more by energy efficiency and conservation.”
In recent weeks, crude oil prices have been hovering between $80 and $90 a barrel and in early January breached the $100 a barrel benchmark. On Friday, world oil prices advanced toward $100 a barrel, briefly topping $96, as geopolitical jitters in places such as Nigeria and Venezuela stoked global supply concerns, even as Federal Reserve Board Chairman Ben Bernanke predicted “a period of sluggish growth” ahead for the energy-dependent U.S. economy.
Also on Friday, the OPEC oil cartel lowered its projections for growth of demand this year in response to a slowdown in world economic growth, predicting demand would likely increase by 1.43 percent rather than a previous estimate of 1.52 percent.
Charles Dallara, managing director of the Institute of International Finance, said he expects a dip in commodity prices as a result of a slowdown in the U.S., the world’s biggest economy. But Dallara, a former U.S. Treasury official, said he thinks agricultural commodities “are less likely to be affected by the slowdown then perhaps crude oil.”
However, the scenario feared by most is geopolitical crises, especially in oil-rich nations, or a terrorist attack on key oil infrastructure or transportation choke points, sending prices to new highs.
Fred Bergsten, director of the Washington-based Peterson Institute for International Economics, told the WEF attendees, “There is concern that oil will go up to $200 [a barrel] driven by geopolitical crisis.”
Daniel Yergin, chairman of Cambridge Energy Research Associates, said in an interview that his group has one scenario called “breakpoint” where the price of oil, as a result of geopolitical disruption, rises to $150 a barrel before retreating.