Huge energy costs are the new debt crisis

Steve Sedgwick
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GREAT. Just as we begin to think of a world saved from immediate financial collapse as the 7th Cavalry that is the European Central Bank’s (ECB) Long-Term Refinancing Operations (LTRO) and Anglo-Saxon QE swamp the banks with liquidity, along comes the next crisis. The new kid on the block is a familiar foe: exploding energy prices.

Back in November I read in the Economist’s “World in 2012” crystal ball gazing exercise how “falling” oil prices could be the “deus ex machina”, the factor that could save the world from economic collapse. The Economist argued weakening demand would lead to falling crude prices, acting as a huge multi-billion stimulus to the teetering world economy. Needless to say, it wasn’t to be.

Here we are, barely having wiped the sweat off our brow from the latest Eurozone crisis and the house of cards is threatening to come down again as oil prices jump to their highest levels since 2008.

Brent is up to the mid-$120s, with futures at one point reaching over $128 last week. During the dark days of 2008 Brent’s high was $147.50.

The reasons? It’s not just concern about Iranian tension. There’s also production fears elsewhere, including Nigeria. On the demand side Africa, Asia and Latin America all keep consuming voraciously.

So are we going back to 2008 highs? My old sparring partner on Squawk Box, Neil Atkinson of Datamonitor, says conditions for a repeat of 2008 look to be in place. He points out that prices rose to near $150 per barrel before economic crisis set in.

Meanwhile, Stephen King, chief economist at HSBC, chipped in last week with a cheery research note entitled “Oil is the new Greece”, which notes that, even without tensions surrounding Iran, Israel and the other flashpoints, on current demand growth China alone will be attempting to consume the equivalent of all today’s global oil output by 2035.

And yet I can’t help feeling we’ve seen all this before. Let’s not forget that after the peaks of mid-2008, West Texas Intermediate (WTI) oil promptly fell uncontrollably to just over $30 per barrel by the end of the year, as we stared economic and financial collapse in the face.

Maybe, in a funny kind of a way, the oil price decline stimulus idea may have some legs in it still. Add the fact that in North America there is a serious ratcheting up of domestic energy supply then it’s still all to play for. Let us at least hope those lovely chaps collectively dubbed as “speculators” will act to dampen the volatility.

Steve Sedgwick is an anchor at CNBC