Monday, July 14, 2008

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Oil Crisis of 70s vs 2000s: Will history repeat or Will it be worse than history?

Oil price has doubled thus far, with speculation that it'd surge to $200 or $400 per bareel. Oil price is not only the concern of traders these days, it has become the concern of everyone from housewives to salaried employees to businesses. It is posing a threat to the stability of the world economy today.

For older folks, the current oil crisis will inevitably bring to mind the oil crisis of the 70s. What parallels can be drawn between the oil crisis then and now? What happened then? Will history repeat itself? Or will it be worse than history?

Most comparisons turn to the low growth, high inflation, weak dollar and soaring energy prices of the 1970s, but this time with a housing crisis and spiking commodities prices thrown in, all threatening a prolonged recession.

Oil Crisis of 70s result of OPEC oil embargo

The following excerpt from The Oil Recession of the 70s gives a brief description of what happened then:

Back then, the OPEC oil embargo sent crude oil tripling in prices within 6 months from $3.77 a barrel to $12. After which during the late 1978 during the Iran revolution, oil prices doubled to $30. Oil prices multiplied by 10 times within a period of 7 years. During our decade, oil prices increased from $30 to $145 within 5 times. The US Central bank started attacking the oil led recession by increasing interest rates to 20%. It worked but US fell into a deep recession.

Oil Crisis of 2000s result of Weak Dollar, Supply Problems & Increased Demand

Today, the US central bank is trying to achieve a reasonable amount of inflation within the system without resorting to take drastic action to plunge the US into another serious depression. Ben Benarke, the chairman of the central bank, an avid students of the great depression and the 1980s recession is trying to maneuver the economic such that history will not repeat itself again. Benarke has reduced interest rate again and again to help reduce the subprime impact on the US economy. This has however weakened the US dollar,and send oil price higher,

Benarke's walking on tight rope. The squeeze has left him with neither the space to move left or right, so the last Fed meeting saw the interest rate left unchanged.

Meanwhile subprime related losses continue to mount. The recent crisis in Fannie Mae and Freddie Mac and the collapse of IndyMac has sent another shockwave through the market.

And oil price remains at the threatening level of $145 per barrel.

Traders said mounting geopolitical tension in the oil-rich Middle East and unrest in key producer Nigeria will continue to provide underlying support for prices.

"It seems clear that geopolitics will continue to provide fuel for the seemingly relentless rally, with Iran and Western nations still at a standoff over the Islamic republic's pursuit of a uranium enrichment program," said Linda Rafield, senior analyst at energy information provider Platts.

Tehran insists its nuclear drive is aimed solely at generating energy but some Western nations fear it could be aimed at making an atomic bomb and have called for a freeze of its uranium enrichment program.

Iran is the second-biggest crude oil producer in the Organization of the Petroleum Exporting Countries cartel. The country's output is about four million barrels per day.

OPEC has said the cartel would not be able to replace Iran's oil production if supplies were halted in case of a war with Israel or the United States.

Finally, increased demand for oil in the emerging economies like China and India will continue to see supply lagging demand.

George Sorros described the current economic crisis as "slow in coming but the slower it comes, the more powerful it is."

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The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.

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