09 August 2006
As a result of the U.S. Federal Reserve's
decision to leave current interest rates unchanged, PINR recommends the
following recent in-depth analysis that finds "The Fed's new dovish place in the
trunk could greatly accelerate inflation in the second half of 2006, prompting
dollar depreciation and a sharp increase in U.S. bond yields."
"Current U.S. Federal Reserve Policy Could Accelerate
Inflation"
http://www.pinr.com/report.php?ac=view_report&report_id=536
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Economic Brief: Alaska Pipeline Shutdown and the Rise of
Oil Prices
Drafted By:
http://www.pinr.com
The August 6 announcement by major
oil company BP that it will need to shutdown 400,000 barrels a day of oil
production in Alaska is the latest development pushing crude oil futures toward
US$80 per barrel. BP's shutdown came after an oil spill was discovered in
Alaska's North Slope in March. After finding the hole in the pipeline
responsible for the leak, the company admitted that the crack was part of a
larger pipeline corrosion problem that will force BP to replace 25 kilometers
(16 miles) of a 35-kilometer (22-mile) pipeline that originates in Prudhoe Bay
in Alaska. The production halt is expected to last 60-90 days. The Alaskan
shutdown is the latest contributing factor to record high oil prices.
The upward trend of oil prices largely began in late 2003. At the start
of the new century, oil prices fluctuated between $20 and $30 a barrel. The
September 11, 2001 attacks on the United States damaged the U.S. economy
severely, thus sending oil prices below $20 a barrel as a result of reduced
demand. In the following two years, however, the U.S. economy began to rebound,
increasing energy demand and causing an upward trend in oil prices.
Yet
it was after the U.S.-led intervention in Iraq that oil prices began to escalate
sharply. After it became clear to investors that the intervention in Iraq would
be more complicated than originally predicted, uncertainty began to enter the
energy market. This uncertainty was punctuated by an attack by Iraqi insurgents
on an oil pipeline in northern Iraq in August 2003, a tactic that has been
repeated regularly for three years now.
In 2004, the price of oil moved
higher, hovering near $50 a barrel as a number of factors contributed to market
instability. In addition to the deteriorating security situation in Iraq and the
regular attacks on pipelines there, workers in oil-rich Nigeria launched a
general strike to protest the rising domestic fuel prices.
By the end of
2005, oil prices hit $70 a barrel and stabilized between $60 and $70. The
instability in Iraq, mounting ethnic unrest in Nigeria, concerns about Iran's
nuclear program and growing energy demand in China were all to blame for the
dramatic price increase. Contributing to the rise in oil prices was the surprise
devastation caused by hurricane Katrina that devastated the eastern coast of the
Gulf of Mexico, causing damage and supply disruptions to off-shore oil rigs and
U.S. refining capacity.
More than halfway through 2006, oil prices have
almost surpassed $80 a barrel. A mixture of growing unrest in Iraq, Russian gas
cuts to Europe, the threat of sanctions against Iran, an escalating ethnic
insurgency in Nigeria's oil region, a low-scale war between Israel and Lebanon,
an attack on Saudi Arabia's Abqaiq oil facilities and now the shutdown of a
section of BP's pipeline in Alaska are to blame for the price hike.
Nevertheless, the global economy has been able to withstand the sharp
increase in oil prices. The world economy experienced positive growth in 2004
and 2005. However, inflation is on the rise, largely as a result of increased
oil prices. With the current geopolitical outlook heavy with uncertainty, it can
be expected that oil prices will maintain their current highs and probably
continue to rise.
The current conflict between Israel and Lebanon risks
spilling over into the region; the insurgency in Iraq has grown more sectarian
and chaotic; ethnic insurgent groups in Nigeria have threatened to shut down the
country's oil exports; China's energy demand remains high; a new hurricane
season is approaching the United States in the coming months; and al-Qaeda and
other Islamist militant organizations continue to make threats against oil
interests in Saudi Arabia and elsewhere. Any significant reduction in oil
exports -- coming at a time when oil producers are pumping at near full capacity
-- will send oil futures close to or past $100 a barrel, contributing
significantly to inflationary pressures that could derail state economies and
cause a widespread economic recession.
