This summer will mark five years since 2008, the year of both the first flush of the global financial crisis, and of the peak of the combined food and fuel spike.
As David Steven and I have observed in various papers, the last decade was bookended by shocks – 9/11 at one end, and these two at the other. And while the resource spike and the credit crunch lacked the visual vividness of September 11, they were arguably just as significant in the way that they shook assumptions about the stability or direction of globalisation.
But it’s also intesting to look back now at that strange year, and reflect on how many of the initial fears, hopes and assumptions about the twin crises have been proved wrong with the benefit of five years’ hindsight – as well as various shifts that have taken place since 2008 that no-one foresaw at the time. Here are ten things that lots of us (well, I, anyway) got wrong or missed altogether back in 2008 – adapted from a futures presentation I gave to Oxfam last week.
Ever heard of spare capacity theory? It’s defined by Gregor Macdonald as:
the assumption among western bankers, policy makers, economists, and stock markets that OPEC producers can lift oil production at will, and, export all of that spare production to world consumers.
(See also this recent post on Global Dashboard, and this one from back in 2008.) There’s a lot of spare capacity theory doing the rounds at the moment, given what’s happening in North Africa and the Middle East. Libya normally produces 1.6 million barrels of oil a day (a little under 2% of global production). It’s estimated that about 350,000 barrels, or 22%, of that is now offline, and depending on how things pan out, it could stay offline for some time.
Now imagine what happens if it all kicks off in Algeria (a larger exporter than Libya of oil plus oil products). Or, for that matter, in Iraq, Iran, or Saudi Arabia – all of which are much more significant again. That’s what has traders and futures markets spooked, and everyone looking to Saudi Arabia: as a source quoted in the FT this morning puts it,
“It is fear of the unknown. The risks are all to the upside. Saudi Arabia needs to respond.”
Saudi Arabia, for its part, insists that it can and will increase production if needed:
“Right now, there are active talks in order to implement what is needed,” the Saudi official said. He stressed that the kingdom retains spare capacity of some 4m barrels a day – more than double Libya’s entire output, which totalled 1.58m b/d in January, according to the International Energy Agency.
Saudi Arabia has not yet decided whether to increase production. If it proved necessary to produce more, “then that will happen, there’s no problem at all”, the official said.
But what if that’s not true? Gregor Macdonald argues that the extent to which markets have climbed over the past week “suggests the market is justifiably concerned about events in Libya, and the risk of more unrest to come in oil producing regions”. His conclusion:
Given the potential magnitude of this situation, I actually think its good that we can still rely on price as a means to ration supply.
True though that may be, a new oil price spike is exactly what we didn’t need on global food prices at this point. Back at the start of the year, the fact that we weren’t in the middle of an oil spike was one of the factors I drew comfort from on the food outlook. Not now…