Crude Volatility by Robert McNally

Author:Robert McNally
Language: eng
Format: epub
Tags: BUS070040, Business & Economics/Industries/Energy, BUS023000, Business & Economics/Economic History
Publisher: Columbia University Press
Published: 2017-01-16T16:00:00+00:00

THE GHOST OF JAKARTA

The unexpected price increase in 1996 and 1997 averted a full clash between Venezuela and other OPEC members.9 But later in 1997 the Asian financial crisis hit, abruptly hurting oil demand, and threw OPEC and other oil producers back into crisis mode. The Asian financial crisis had its origins in the aforementioned strong growth, which had attracted massive capital inflow that was channeled into a real estate bubble. In July 1997 the Thai currency (baht) collapsed, triggering other Asian currency and banking collapses that mushroomed by year-end into widespread economic downturn and bankruptcies.10 But as OPEC prepared to meet in Jakarta in November 1997, producers’ minds were less focused on the gathering Asian crisis than on the oil price spike that had preceded it. On November 27, OPEC ministers approved a 2.5 mb/d or 10 percent quota hike, confident that demand was robust enough to keep prices stable.11

OPEC producers soon regretted the decision.

The mismatch between slowing demand and rising supply caused oil inventories to swell rapidly in consuming countries in early 1998. After an IEA report, in an about-face from a few years before, estimated global supply would exceed demand by an unusually large 3.5 mb/d in the second quarter of 1998, oil prices tanked. By early 1999, prices for some grades of crude oil fell as low as $8 per barrel. In a March 1999 cover, The Economist blared that the world was “drowning in oil.” OPEC producers quickly realized they had made a mistake, and thereafter would be haunted by the “Ghost of Jakarta”—the folly of loosening quotas without accurately assessing if oil demand was strong enough to keep the prices steady.

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