By Brendan Lowney, Vice President, Macroeconomics, RISI
BOSTON, MA, Aug. 22, 2008 - The great oil boom of 2007-2008 is over. After rising from $55 per barrel to $92 per barrel (a 67% increase) over the course of 2007 and then surging by another 60% to a record high of $147 by early July, the price of West Texas Intermediate oil has since slid to $110 before bouncing back to its current level of $118. The slide in oil prices is mostly a demand story although the strengthening US dollar and steady increase in supply has also played a role. Let's start with the demand story.
To a great extent the boom fell victim to its own success as surging oil prices led to demand destruction of both a cyclical and a structural nature. A quick glance at recently released second-quarter national income statistics for the major advanced economies shows their vulnerability in the face of $140 per barrel oil. Real GDP declined by 2.4% in Japan, 2% in Germany, 1.2% in France, and 1.1% in Italy and limped forward by 0.8% in Great Britain (all rates annualized). Meanwhile, US real GDP posted a below-trend growth rate of 1.9% (as of press time, Canada has not released its 2nd-quarter statistics -- its real GDP did decline by 0.3% in the first quarter).
Meanwhile, oil producers should take no solace in the fact that the US economy managed to grow by nearly 2% despite surging oil prices. The US economy is the least efficient user of energy among the advanced economies and thus is bound to have the most profound demand-side reaction to energy prices. In fact, the US reaction to higher energy prices has been robust.
This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.
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