Roll out the barrel

31 January 2003

The presumption is that future oil prices will fall sharply, postIraq. But there are good reasons why they may not. And it looks increasingly anomalous. Crude oil prices have risen by 55% over the past year. Yet oil firms shares have fallen by 25%.

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The price of crude oil has soared by 55% over the past year to over $30 a barrel due to a Gulf war premium and a strike in Venezuela.

Over the same period, oil company share prices have fallen by about a quarter. The Venezuelan strike, which has removed some 2 million barrels of exports a day, is one of the largest shocks in oil market history.

As a rule of thumb, Goldman Sachs estimates that a sustained 10% increase in oil prices reduces growth in the seven most industrial nations by 0.3% after a year. A short but sharp 50% oil price increase, say over a quarter, cuts economic growth by 0.7%.

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