Growing fears of an enduring oil crisis prompted huge volatility on investment markets yesterday – with shares in the world's biggest oil producer, Saudi Arabia, slumping to a 22-month low – as a top energy official warned that the "age of cheap oil is over".
Concerns about the turmoil in Libya triggered sharp sell-offs in stock markets across the Gulf, with shares in Kuwait and Dubai sliding to six-year lows. Oil prices also remained volatile throughout yesterday, with Brent crude futures for April delivery breaching the $117 (£72) per barrel mark in late afternoon trading.
In London, the FTSE 100 fell sharply in the morning, declining by more than 2 per cent at one point, before recovering to close only slightly lower on the day.
The nerves among investors were evident in the movements in the gold price, which touched a record high above $1,440 per ounce. The yellow metal, the traditional destination for investors seeking to preserve their wealth during times of turmoil, was up 6 per cent in February, recording its biggest monthly rise since August.
Last night's swings came as the chief economist of the International Energy Agency, Fatih Birol, warned that the world may have to face up to the prospect of high oil prices over the long term. "The age of cheap oil is over, though policy action could bring lower international prices than would otherwise be the case," he said.
Mr Birol also struck a note of caution on Europe's recovery prospects as the continent deals with increased fuel costs. "Europe is the weakest link in the chain of economic recovery," he said. "75 per cent of gas prices [in Europe] are linked to oil prices. In a few months gas prices are going to increase."
On the other side of the Atlantic, the US Energy Secretary, Steven Chu, added his voice to the growing chorus of concern about rising oil prices. "Today's spike in oil prices is causing great concern, great hardship [for] the American people," he said while testifying before the US Congress. "We have a very delicate recovery going on and an increase in prices will make that vulnerable."
Underscoring the impact of higher oil prices, the International Air Transport Association said rising costs will halve profits at global airlines.
The industry body scaled back its profit forecast for this year to $8.6bn, against the $16bn it thinks the airlines made in 2010. The implication is that airlines would see their profit margins narrow to 1.4 per cent, down from nearly 3 per cent last year.
The forecasts are based on an average oil price of $96 per barrel for Brent crude this year, up from the previous assumption of an average price of $84 per barrel in December.
Higher prices mean that the industry's fuel bill for 2011 is now seen at $166bn, accounting for nearly 30 per cent of total costs. That compares to $139bn, or 26 per cent of costs, in 2010.
IATA's director general, Giovanni Bisignani, also flagged up the threat of higher taxes, which could further undermine profits across the industry.
"We are constantly walking on a tightrope with very thin margins, and there is no buffer," he said, noting that every $1 increase in the oil price brings $1.6bn in costs to airlines. "This industry is very, very fragile."
Bidding to calm nerves across the commodity markets, the IEA's executive director, Nobuo Tanaka, said Saudi Arabia could make up any shortfalls from crisis-hit Libya. "Even if Libya stops production completely, at one to 1.5 million barrels per day, Saudi Arabia can offset for this demand if necessary," he said.
He also highlighted the IEA's own stockpiles, saying: "We can release two million barrels per day for two years. We don't really have to worry too much about the supply side."
But among the factors behind the volatility yesterday was concern that Saudi Arabia itself may fall prey to the recent wave of protests sweeping through the Middle East.
One Riyadh-based fund manager said local markets had been overtaken by panic. "Fundamentals are out – it's all about fear and panic and not knowing exactly what's happening in the market," he explained.
A Dubai-based analyst highlighted plans for protests in Saudi Arabia's Eastern Province as the driver of the panic. "There's a protest planned for the Eastern Province, which is where the Shia minority and the oil are, and this sparked selling," he said.