Recessionary and Recovery Period
October 2010
Development of a Global Recession
The 2008/09 global recession was characterized by collapses in U.S. housing prices23, the failure of many financial institutions under the weight of bad debt, and a dramatic decline in the stock and commodity markets. In 2009, world economic output declined by -0.8%, with advanced economies experiencing a sharper decline at -3.2% according to the latest IMF reports. In 2009, world trade was expected to decline by 9%.
The global recession reduced the demand for oil in many sectors including transportation, manufacturing and construction. In April 2010, the IEA reported that world oil demand fell by 1.3 Mb/d from 86.2 Mb/d in 2008 to 84.9 Mb/d in 2009.24 Oil demand declines were most pronounced in the Organization of Economic Development (OECD) countries, while the rate of oil demand growth slowed considerably in key emerging economies, such as China and the Middle East.
Oil Price Collapse
Weak oil demand caused by the recession was the major factor causing the late 2008/early 2009 collapse in oil prices. The daily oil price, which had peaked at $147 per barrel in July 2008, declined to a bottom of only $30 per barrel by late December 2008.
In October 2009, the IMF stated that the global recession appears to be ending but the recovery will be weak by historic standards, with continued credit constraints and slow employment growth. Canada along with many other nations felt the full impact from the global recession. At its worst, according to Statistics Canada, Canada’s economy shrank 5.4% on an annualized basis in the first quarter of 2009, the largest decline since 1991.25
Oil Price Recovery
A series of measures and events have served to cause a recovery in world crude oil prices:
- In the fall of 2008, responding to falling oil prices and weak oil demand, OPEC announced 4.2 Mb/d of production cuts (the largest cuts in the history of the organization).
- OPEC also announced an oil price target of $70 to $80 per barrel for a barrel of crude oil. At that target price, the budgets of most OPEC member countries will be balanced.
- Global economic growth was estimated at 3.0% in 2010 because of recent stimulus measures. 26
As the global economy recovers, the market expects that world oil demand will increase. According to the IEA, world oil demand is expected to grow by 1.7 Mb/d – from 84.9 Mb/d in 2009 to 86.6 Mb/d in 201027. In 2010, more than 80% of the oil demand growth is expected from Asia, the Middle East and the Latin American regions.
Due to these factors, by April 2010, crude oil was trading at more than $80 per barrel, more than double the low price of December 2008. Crude oil has remained in the $70-85 per barrel range since.
OPEC’s spare capacity, estimated at an average of 6.4 Mb/d for the first nine months of 2009, is more than twice as high as the five-year average (2004-2008 - 2.8 Mb/d). There is more than enough oil to deal with possible supply disruptions and this has perhaps had a stabilizing effect on oil prices, preventing them from rising to 2008 levels.