Were it not for the financial crisis that engulfed the global economy and sent the world spiraling into a global recession last year, 2008 would most likely have been remembered as the year of the runaway oil price.

Just a matter of days into the start of the year the price of crude oil hit $100 a barrel for the first time, a record that was soon surpassed, as oil eventually peaked at $147 six months later in July.

A year later the price has slumped by around two thirds, bringing some much needed relief to embattled consumers with petrol prices in South Africa now at two-year lows. With interest rates and inflation also expected to fall sharply this year, consumers are set to benefit from an easier time in 2009.

However, with news that fuel prices are set to increase again next month, the question on everybody’s lips is: Where will oil prices go next and can we expect to see the price of the commodity, and consequently fuel costs, soar again?

Why did oil prices soar?

For nearly two decades, following the oil boom of the 1970s, oil traded in a relatively narrow band, but rising demand from emerging markets, geopolitical unrest in the Middle East and concerns over a lack of supply conspired to drive prices higher.

Whilst China’s consumption of around 7m barrels of oil per day is still dwarfed by the more than 20m barrels consumed daily by the US, the emerging giant is often cited as a critical factor in the rising oil price, as it accounts for around 40% of the increase in demand.

It is important to note, however, that an increase in demand from China also coincided with a long period of low crude prices, which resulted in a lack of investment in the industry.

A 2005 study found that while world oil production had risen by 40% over the past 20 years, refinery capacity had risen by just 15%, as oil companies refrained from investing in further capacity, as the price of oil was deemed too low to make the projects profitable.

Are fuel prices likely to soar again?

Economists agree that the direction of the oil price in the near term is largely dependent on the outcome of the global financial crisis, with a deeper recession keeping demand for oil subdued, and therefore prices under pressure.

Nedbank economist Carmen Altenkirch says the general view among analysts is that oil will remain “at around current prices for much of this year,” but adds that weak demand from the US and other key economies could see the price fall below $30 a barrel, though in the medium term she says prices could recover to between $60 and $80 a barrel.

“One should also watch what happens to Chinese growth,” says Altenkirch. “The Chinese economy is expected to grow at around 8% this year, down from over 10% last year. If Chinese growth proves to be even lower, it will also add to negative pressure on prices.”

This could well be the case as latest figures from China revealed that the economy grew by just 6.8% in the fourth quarter of 2008, taking growth for last year to a 7-year low of 9%. A survey of analysts by Reuters in January also revealed that global demand for oil is expected to contract more than expected this year, as the economic malaise spreads to the developing world.

Concern over stability in the Middle East and other oil-producing nations was previously cited as a major factor in the direction of oil prices, however as Josina Oliphant, a commodities researcher at Rand Merchant Bank (RMB) points out, weak global demand is now outweighing such concerns.

“In the near term, we expect slowing demand fundamentals to outweigh any supply-related factors including the geo-political tension in the Middle East,” says Oliphant.

This has been borne out by the fact that OPEC, the oil cartel, has been cutting production quotas since October, including its biggest ever production cut, however the price remains far below the cartel’s target of $75 a barrel for 2009.

Jeremy Stevens, an economist at Standard Bank, goes further by saying that while the growth outlook for mature economies is “critical” in deciding the price of commodities, even more important to the outlook for energy and metals are the growth rates associated with numerous emerging markets.

He adds that 2009 will likely see these economies rebalancing towards more domestic demand-driven growth, suggesting a “relatively soft outlook for oil from a cyclical perspective as both pillars - the mature economies and fast growing emerging markets - are slowing.”

Are there any drawbacks to a low oil price?

For a non oil-producing country such as South Africa, low oil prices are clearly a positive, with industry benefiting from lower manufacturing and transporting costs, whilst cheaper fuel for consumers encourages spending elsewhere in the economy.

Kay Walsh, an economist at RMB, also notes that while lower inflation promotes consumer spending, deflation from a further drop in prices is a real risk. “The risk associated with deflationary conditions is that consumers postpone spending in the hope that they will benefit from lower prices in the future and this effectively acts as an additional brake on growth.”

RMB’s Josina Oliphant also takes a wider view of the impact of lower commodity prices, noting that while cheaper oil benefits South Africa, the global decrease in demand for commodities will hurt the country, as commodity exports equate to more than 50% of South Africa’s exports.

“The global economic downturn is also expected to add to global risk aversion, placing further upward pressure on the local currency, which in turn makes the planned capital expenditure projects that are forecast to drive much of the growth in 2009, less viable,” says Oliphant.

What is the impact for African oil producers?

Africa’s oil-producing nations, such as Angola and Nigeria, are likely to see a more direct impact, however, as oil equates to between 80 - 95% of exports, with the increase in foreign direct investment (FDI) in recent years being largely focused on the oil sector.

Nedbank’s Carmen Altenkirch suggests that if oil prices bounce back over the next 12 to 18 months then the long term impact on these economies will be fairly minimal, however if prices remain subdued for longer, economic growth could return to levels seen prior to the oil boom, impacting on government’s infrastructure and social development spending.

Jeremy Stevens is more positive, noting that tighter budgets generally enable governments to learn from past misjudgements, adding that lower prices and revenues necessitate transparency, improving the decision making process, as it is becomes even more important how the finances are spent.

“Furthermore, it rebalances the weighted importance of oil in a manner that encourages economic diversification and, potentially, leads to the democratisation of the economy in the longer term,” adds Stevens.

What does it mean for the man on the street?

Much has been made of the impact of high oil prices on consumers, however South Africa’s petrol station owners, many of them franchisees, have also been hard hit by the rising crude price, as consumers began reducing their fuel consumption.

A survey published last year found that up to 15-percent of petrol stations mainly in low-income areas such as townships, were on the verge of bankruptcy by the middle of 2007, even before the oil price hit its record high

Peter Morgan, CEO of the Fuel Retailer’s Association, says fuel retailing is a volume business. Retailers get a fixed margin of 69.7 cents per litre, regardless of the price of petrol. As the stations rely on high volumes for profit, a cutback from consumers directly affects profit margins.

What to expect in 2009

In the short term, oil prices remain heavily dependent on how deep the global recession proves to be, and with little sign of the credit crunch dissipating, oil prices seem likely to remain at current subdued levels for much of 2009.

Recent figures from China suggest the economy is contracting faster than expected, which could drag prices even lower, whilst analysts are also revising down their estimates of global oil demand for the year.

While this provides a direct positive for South Africa in terms of lower oil prices, it also remains indicative of falling global demand for commodities, a negative factor when more than half of the country’s exports are commodities.

“A more moderate and sustainable demand-driven increase in commodity prices would probably be the best scenario for African nations as a whole,” says Standard Bank’s Jeremy Stevens, noting that lower prices tend to discourage further investment into more energy efficient sources.

Consumers can expect cheaper fuel costs for much of this year, however while savings will be made filling up the car, it proves a double-edged sword, as the recession that keeps oil prices low also curtails economic growth and investment into the country.

This is the conundrum facing resource-rich Africa: low oil prices may provide an immediate relief for consumers, but higher commodity (including oil) prices are indicative of a growing global economy, a crucial factor in the facilitation of FDI and demand for exports.