Crude oil prices took a few years to run up

Crude oil prices took a few years to run up from US$40 per barrel (/bbl) on a monthly basis to reach a record of nearly US$140/bbl in mid-2008. However, prices fell back to around the same level over a span of a few months, as demand weakened dramatically due to the deterioration of the global economy. This is illustrated in the figure below for the three major crudes.
Prices have stabilized at around US$40-45/bbl as OPEC cut its output target by 4.2 million barrels per day (mmb/d), equivalent to approximately 5% of global supply and 15% of OPEC crude output, versus September 2008. OPEC member compliance with output targets is always  an issue, but recent indications are the group has been reasonably successful at meeting targets.
The amount of over-production in February, according to OPEC’s latest assessment based on secondary sources, was around 800 kb/d. However, we have considerable doubt that actual OPEC-11 output will decrease much further towards the current official OPEC-11 output ceiling of 24.85 mmb/d because of the reluctance by several members to reduce output, especially Angola and Iran.
High oil prices in the first half of 2008, coupled with a sluggish economy, had a dramatic impact on the US, where oil demand for the year fell by 5.3%—the biggest decline in 26 years. Demand growth in the Asia Pacific was still holding up in the first half of 2008 as regulated prices in many countries were not raised substantially, especially in China and India, the two drivers of Asian demand growth. Furthermore, most Asian economies were still growing healthily, albeit lower than a year ago. Things changed quickly in the second half of last year, as oil demand eakened substantially as the economy slowed. In fact, several countries in Asia were
technically in recession by the fourth quarter.
The global economy took a sharp dip after Lehman Brothers filed for bankruptcy in mid-
September 2008, with a chain of events taking place thereafter. Lehman’s demise followed the failure of the two American mortgage guarantee agencies, Fannie Mae and Freddie Mac, which were seized by the US government just a week earlier. At the heart of many of these institution’s portfolios were investments whose assets were linked to mortgage-backed securities, where lenders bundled up the high-risk poor-quality subprime loans, mixed them up with some goodquality mortgages, and sold the packages of debt in a process referred to as securitization.
Asian financial institutions overall have limited exposure to US subprime mortgages and
structured credit products from overseas, attributable in part to the more cautious risk
management and the strengthening of the regulatory structure that resulted from the 1997
financial crisis in emerging Asia. However, capital outflows have significantly weakened
currencies in some countries, notably India, South Korea, and Australia. Furthermore, Asia’s
economies are closely intertwined with the US and Europe, so it was only a matter of time before
the region felt the impact of the spreading economic crisis. The Asian economies deteriorated
sharply in the second half of 2008, especially in the fourth quarter, with the economies of China
and India both slowing substantially. The export sectors of many Asian economies and exportoriented
countries have been hit the hardest because of the shrinking markets of the US and
Europe.
There was some hope that the crisis might be coming to an end as stock markets seemed to be
more stable towards the end of 2008. Beginning January 2009, however, stock markets started to
trend downward again as more banks in the US were in need of bailouts to recover losses
incurred from defaulted mortgages. Stocks rallied on March 23 after the Obama administration
unveiled its plan to remove toxic assets from the books of the nation’s banks.
There is little doubt that the current financial crisis is historic in its proportions and nature. The
market interventions undertaken by government agencies around the world over the last few
months have been unprecedented as they attempted to stabilize the markets and avoid a
meltdown of the world’s financial system. The crisis is ongoing and continues to change as
various events unfold. It will take time for these measures to take effect, and jittery markets are
expected to continue until the economy has stabilized.
Of course, it is not all gloom and doom for Asian economies. Commodity prices have fallen
dramatically, which provides some relief by allowing for expenditures in other areas.
Inflationary pressures have also eased, giving the authorities greater scope to utilize monetary
levers to help boost the economy. Finally, the fundamental strengths of the regional economy
remain in place. When the global economy recovers from its current malaise, Asia’s economic
growth—and energy demand—should rebound quickly.

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