ENERGY: A SPECIAL REPORT
Oil's stunning retreat: How long can it last?
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NEW YORK: After surging to record levels this summer, oil prices have suffered a dizzying collapse in recent months, echoing the darkening prospects of the global economy.
Within three months, drastic swings drove oil prices from their peak of $147.27 a barrel to less than $65 a barrel. Oil industry analysts at Goldman Sachs, who had raised the possibility that prices could reach $200 this year, now believe that oil could drop to $50 a barrel in the event of a global recession.
While consumers can cheer the drop, producers have been alarmed at the sudden downturn in their fortunes. Fears of a global slowdown have kicked off a down cycle in the oil sector: It is unclear how long it will last and how low prices will go.
As oil gets caught in the wild gyrations of the financial meltdown, three major questions loom over the oil markets for next year.
What will happen to oil consumption in the United States and in China? How will producers respond to lower prices? Can the oil cartel OPEC stop the slide in prices?
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In the past decade, economic growth in emerging countries from Asia to Latin America has propelled a surge in oil demand. Consumption in developing nations jumped by more than 40 percent since 1998 while oil producers struggled to increase their output. That disparity severely tightened oil markets and led to a 14-fold increase in prices from its $10-a-barrel trough to its peak in July.
But high prices and a slowing economy have led to a stark reduction in demand across the industrialized world that probably will outweigh growth in oil consumption from such developing nations as China.
After a quarter century of growth, some analysts say it is quite possible that this year global oil consumption could have its first annual drop since 1983.
In its latest outlook, the International Monetary Fund knocked nearly a percentage point off its forecast for global economic growth for 2009, with developed economies barely able to expand by 0.5 percent.
In turn, that means that global oil demand over the next two years may prove anemic, experts said.
"Oil is integral to the real economy," said Jan Stuart, an energy economist in New York for UBS. "If the real economy goes down, oil goes down. The market right now is trading a long recession and literally no growth in oil demand for years."
Didier Houssin, director of the office of energy markets and security at the International Energy Agency, the world's main forecaster, said there were strong uncertainties about how demand will evolve because of the economic and financial crisis. "That remains a big mystery," he said.
Faced with slowing growth, the International Energy Agency has been paring its forecast for global oil demand since the beginning of the year. But its analysts still see oil demand expanding by 400,000 barrels a day this year, to 86.5 million barrels a day. When the year started, they forecast growth of two million barrels a day for 2008. Some analysts say the energy agency's current forecast is still hopelessly optimistic.
"Despite the IEA's wishful thinking, demand is disappearing very quickly," said Lawrence Goldstein, an economist at the Energy Policy Research Foundation in Washington, who said he expected global oil demand to fall this year. It would be the first drop since the energy shock of the early 1980s.
The double impact of record high prices and slower economic growth has been particularly visible in the United States, which accounts for a quarter of the world's total oil consumption and where demand has slipped to its lowest level since June 1999. Americans have been driving less and flying less this year. Automakers are desperate for a government bailout and airlines are losing billions of dollars.
As a result, U.S. oil demand will probably decline by 5 percent this year, said Stuart, the UBS energy economist.
Similar declines are also taking place in most developed economies, which account for 60 percent of global demand. In Japan, for example, oil consumption in August tumbled 12 percent from a year earlier, while oil use in France has declined 10 percent.
"There is no question the physical oil market has weakened," Stuart said. "The credit crisis has dried up commerce and halted trade, and that has effectively pushed down demand for oil. The trouble is that no one can predict when this is going to end."
Where prices go next year hinges greatly on what happens in developing countries, especially China. Over the past decade, Chinese oil demand has surged by 85 percent, or 3.5 million barrels a day, and has been the main engine that has driven up oil markets. China accounted for a third of the world's extra oil demand last year.
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