Monday, Oct 29, 2007

Crude oil prices appear increasingly likely to hit their real terms record, that was reached during the second oil crisis in 1979, as nominal prices soar above Dollars 90 a barrel.

West Texas Intermediate crude oil has risen to a nominal all-time high of Dollars 92.22 a barrel on a combination of renewed geopolitical tension over Iran's nuclear programme, weakness of the US dollar and low inventories ahead of the winter.

In real terms, adjusted for inflation, oil is at its highest price since the early 1980s but still below its modern historical peak - equivalent to about Dollars 100-Dollars 110 a barrel in today's money - reached in late 1979 after the Iranian revolution.

Oil traders said that strong speculative flows, Middle East tensions and supportive fundamentals could push crude oil prices towards, if not above, their real term record.

Even so, some analysts remain dismissive about the potential impact of reaching such a level, as the factors behind the price increase are different.

Adam Sieminski, chief energy economist at Deutsche Bank in Washington, said that the current price increase, driven by demand, was different from the 1979 crisis.

"That crisis was driven by a supply shortage and turmoil in the Middle East. That has wider implications on business and consumers' psychology", he said.

Royal Dutch Shell's chief financial officer, Peter Voser, also last week said that record oil prices were being driven by speculation and political tension, not a lack of supply.

There are also discrepancies among energy economists on which level represents the true adjusted record as West Texas Intermediate futures did not exist in the early stages of the second oil crisis, in 1979. That obliges to use for the calculation other crude oils streams that are not exactly comparable.

There is also disagreement about which inflation measure should be used to adjust the price - world inflation or US inflation. But most agree that Dollars 100-Dollars 110 a barrel will represent roughly the real terms record.

A measure taking account of the evolution over time of the rich countries' per capita income has crude oil prices well below the adjusted record. G7 per capita income is now sufficient to buy 456 barrels of crude oil, well above the 320 to 350 barrels between 1980 and 1982.

To bring G7 purchasing power down to this level would require oil prices rising to between Dollars 120-Dollars 130 a barrel, according to Deutsche Bank.

By JAVIER BLAS