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By: Media Eghbal

Crude oil prices reached a historical high of US$147 per barrel in July 2008, surpassing their previous record – when adjusted for inflation – set in December 1979.

While there are some similarities between the two oil spikes, the effects of the 2008 price rises also differ in many ways for governments, consumers and businesses worldwide.

Key points

  • Crude oil prices attained a record high of US$147 per barrel in July 2008. When adjusted for inflation, the price is higher in real terms than the nominal US$39.5 per barrel reached in December 1979;
  • Different factors have contributed to each oil spike, with speculative investment playing a much larger role in the 2008 price rise. The 1979 crisis was largely triggered by supply cuts and panic-buying resulting from the Iranian Revolution and the ensuing Iran-Iraq war;
  • Some key effects of the two spikes have also differed. Although inflation has risen in most countries over 2007-8, price rises are not nearly as severe as those experienced previously, when they reached 13.5% in the USA in 1980, for example;
  • Any negative impact on world economic growth in 2007-8 has been limited by the continued rapid development of major developing markets, particularly China and India, whereas in 1979-80 the global economic slowdown was much more pronounced;
  • Industries bearing the brunt of the 2007-8 oil spike remain the travel and tourism segment, particularly airlines. The same was also true in the wake of the 1979 crisis, while the main beneficiaries are again hydrocarbons-related companies and oil-rich nations;
  • In 2007-8, many smaller energy-rich countries are reinvesting windfalls in more sustainable ways than in the early 1980s. Yet others, for instance Saudi Arabia or newly emerging African nations, are not considered to be doing enough to diversify economies to protect against the negative impact of a drop in oil prices;
  • The longer-term effects of the 2008 oil boom may be similar to the 1979 spike, by encouraging energy conservation, greater interest in renewable energy and strategic decisions to reduce dependence on oil imports.

Diverse reasons

In 2007-8 and 1979-80, oil prices soared owing to different reasons, in both cases having far-reaching effects:

  • Oil prices have enormous impacts on businesses and consumers, directly affecting the price of most other goods and services, including transportation, building materials, gasoline and food;
  • Most of the world’s countries are dependent on oil imports, which make them reliant to varying extents on net oil exporters. Many, but not all, of these exporters are located in developing and sometimes unstable regions;
  • In 1979 the jump in prices was chiefly caused by the Iranian Revolution and the ensuing war with Iraq, which saw oil production tail off significantly in both countries and cause severe gasoline shortages in developed markets, particularly the USA;
  • In contrast, a key element of the 2007-8 oil spike is believed to be speculative buying by investors and traders, which conspired to push up prices to abnormal levels;
  • Supply factors also varied between both spikes. In the late 1970s supply was concentrated in fewer countries, generally those in the Arabian Gulf, whereas in 2007-8 production is distributed across a large number of exporters such as Canada, Russia and Norway;
  • The same is true for demand. In 2007-8, the fastest-growing demand derived from rapidly developing countries in Asia, such as China or India, with large amounts of new, energy-intensive industries. In 1979, however, the bulk of demand growth originated from the USA, Japan and Western Europe;
  • Nevertheless, supply and demand factors also have a role in the 2008 oil price spike. Some also consider that oil-producing countries are restricting output, while others are concerned at a lack of reinvestment in infrastructure such as refineries, which is stoking fears of a future supply shortage.

Inflationary pressures

Overall, inflationary pressures were much stronger in the late 1970s and early 1980s than 2008:

  • World inflation was 17.2% in 1980, just after the oil price reached its then-historical high. Even developed markets were badly affected, with inflation reaching 13.5% in the USA and 16.8% in the UK;
  • Global inflation rates were only 3.9% in 2007 and are expected to be 3.5% in 2008. Nevertheless, prices have still risen sharply: in the eurozone, for instance, inflation reached 4.1% in July 2008, its highest level since the formation of the European Union (EU) and rates are much higher in developing markets;
  • This means that although the cost of most goods and services has risen substantially due to knock-on effects from high oil prices, consumer purchasing power is not being affected in real terms as severely as in the early 1980s.

 

Annual real price of imported crude oil and annual nominal average acquisition cost of crude oil: 1980-2008
US$ per barrel/real price August 2008

Source: US Energy Information Administration (EIA)Note: Data is taken as average January price for each year, except for 2008, where data refers to July 2008.

World economic growth patterns are not being affected as dramatically as in 1980:

  • While real GDP growth worldwide was 1.7% in 1980, worldwide growth is expected to be 4.1% in 2008. This is due to the rapid growth of major emerging markets such as China and India. Real GDP growth in Developing Asia is expected to be 8.4% in 2008 compared to 1.7% for the eurozone;
  • The contrast is greater when looking at developed markets. Both the UK and US economies contracted in 1980, by 2.1% and 0.2% respectively, whereas the 2008 forecast is 1.8% for the UK and 1.3% for the USA. Although growth has slowed significantly in both countries over 2007-8, a recession is not certain and other factors such as the credit crunch and the downturn in housing markets have also contributed;
  • Some other previously important issues have faded, for instance the declining power of trade unions compared to the late 1970s, which has today placed less pressure on wage demands and not caused loss of output through major strike action;
  • Other factors are more significant in the 2007-8 global economy, particularly the collapse of the US sub-prime housing market and the peaking of housing markets in Western Europe – even though this also occurred to some extent in the early 1980s. Food prices have also risen rapidly since 2007, attaining similar real levels to those in the early 1980s, although still below their historical high in 1975.

The winners

As with 1979, recent high oil prices have benefited the main oil-producing states, particularly those where hydrocarbons dominate GDP such as Saudi Arabia, the United Arab Emirates (UAE) or Venezuela. However, production patterns have altered, with many countries rapidly increasing oil output and enjoying windfalls not experienced in former oil spikes:

  • Energy-rich nations in Africa are one such group. Angola, for instance, increased its daily crude oil output by 19 times between 1979 and 2007, to reach 2.0 million barrels per day (bpd);
  • Norway has developed new reserves to increase its production by 475% over the same period, to become one of the world’s top 15 oil producers;
  • In contrast, Iraq produced 34.3% less oil in 2007 than it did in 1979, owing in large part to the ongoing conflict which began in 2003;
  • Some arguments also contend that OPEC (the Organisation of Petroleum Exporting Countries) is deliberately restricting output in order to push prices higher.
Daily crude oil production in selected countries: 1979/2008
million barrels per day

Source: Euromonitor International from national statistics/trade sourcesNote: Historical data on Russia refers to 1985.

Large multinational oil companies have recorded extremely high corporate profits from the windfall, as they did in 1979. Unlike the late 1970s, however, speculative oil traders and investors have also benefited financially.

The losers

In both oil spikes, the negative effects have been felt in similar areas:

  • Travel and tourism has again suffered a serious downturn due to the rising price of fuel. More than 20 airlines have gone bankrupt since mid-2007, following a similar industry trend to the early 1980s;
  • Consumers have been affected due to high inflation having dented purchasing power in most countries. Yet, purchasing power has not been as severely affected as in the early 1980s when inflation rates were higher;
  • Job losses have affected many industries, for instance in the travel, manufacturing and financial sectors. However, the effects have been most severe in 2008 in developed markets, for instance the USA and Western Europe, while job creation is more buoyant in developing markets with rapid economic growth rates;
  • Governments who subsidise consumer oil prices have again seen their budgets stretched. This applies to many developing markets, including China, and has led to the reduction of subsidies in some cases.

Spending it

Another noteworthy contrast between the 1979 and the 2007-8 oil spike is the investment policies of the main energy producers:

  • Many oil-rich countries, especially in the Arabian Gulf, were considered to have largely squandered revenue windfalls from the late 1970s and early 1980s. There is evidence, however, that better use is being made of oil revenues from the 2008 boom. The UAE and Qatar, for instance, are investing heavily in economic diversification, particularly in tourism and travel;
  • Many oil-rich states, including larger countries such as Russia and China, have set up sovereign wealth funds (SWFs) to reinvest oil wealth overseas. In some cases this has raised political concerns, for instance the UAE’s aborted attempt to buy US port assets in 2006;
  • However, other oil-rich countries still appear to be hindered by corruption and inefficiencies, meaning that revenues are not being filtered down to the wider population. This applies to certain African states, for instance Angola or Nigeria, and is arguably true for the world’s largest oil exporter, Saudi Arabia.

Future scenarios

Oil prices have declined from the July 2008 high and stood at US$115 per barrel in mid-August 2008, partly due to the easing of speculative pressures and the strengthening of the US dollar. Projecting future trends is difficult due to the unpredictable nature of speculation in oil, but it is likely that prices will remain comparatively high until 2009. World economic growth is set to be 4.1% in 2008 from 5.0% in 2007 while high inflation is likely to persist, denting consumer spending and affecting the retail sector in particular.

Similar longer-term effects to those from the 1979 crisis may emerge, particularly with regards to energy conservation, downsizing of vehicles and less frequent air and car travel. The 2008 oil spike is likely to prompt large-scale investment in green or renewable energy. Overall, despite prompting a sharp downturn across many sectors, the 2008 oil spike is unlikely to cause as severe a global recession as in 1979-1980.

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