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The past 12 months have seen volatility in oil prices on an unprecedented scale. A new special report, Recession Shock: The Impact of the Economic and Financial Crisis on the Oil Market, released today by Cambridge Energy Research Associates (CERA) as part of the London Energy Meeting, explores these issues, including: What is driving this extraordinary volatility; the effects on future demand and supply, and the effects on investment and energy security; how the financial crisis and economic downturn is exacerbating the volatility of oil prices, and the possible risks and unanticipated consequences. The London Energy Meeting is being convened by British Prime Minister Gordon Brown bringing energy ministers and other leaders from around the world together for a summit on the global economy and oil markets. It follows a similar meeting convened in Jeddah, in Saudi Arabia, in June 2008. �Spare capacity will increase significantly in the next few years due to falling oil demand and as supply materializes from investments already under way,� said Daniel Yergin, CERA chairman and IHS executive vice president, who is presenting the results of the study to the assembled energy ministers at the London meeting. �As low as one million barrels per day in 2005 and 2.4 million barrels per day in 2008, it could reach seven to eight million barrels per day in 2010 to 2012. �However, in the medium term, low prices and financial constraints will hinder new investment,� Yergin added. �Consequently, as the economy picks up, spare capacity will start to erode and the oil market could begin to tighten again, in the reference case, by 2013 taking the world into a new cycle.� Oil Price Today Barometer of Weaker Global Economy �Another era of strong global economic growth could also accelerate tightness,� Yergin added. �Conversely, if prices are supported at too high a level, long-term spare capacity will grow to levels that could result in a period of prolonged low oil prices.� Among other key factors that the report notes is the potential impact from increased emphasis by governments on greater energy efficiency and alternative fuels. Commissioned by the United Kingdom Department of Energy and Climate Change and the Ministry of Petroleum and Mineral Resources of Saudi Arabia, �Recession Shock� provides context and a framework for understanding the unprecedented rise in oil prices since 2001. It explains why economic growth was not derailed sooner and why prices have collapsed in the past few months. It also presents an illustrative outlook for the world economy and oil market, and examines the psychology of the oil market that reached its apogee in the summer of 2008 � triggered by events that began half a decade earlier. �The oil price was driven to its oxygen-short heights last summer by the �demand shock� that came from five years of strong economic growth, and was fueled further by geopolitics, oil field costs, financial markets and trading, and psychology,� said Yergin, who received the Pulitzer Prize for his book The Prize: the Epic Quest for Oil, Money, and Power. �But today, the oil market is being shaken mightily by a recession shock � and not just a recession shock for oil, but for all energy markets and industries, both conventional and alternatives and renewables,� he continued. �The oil price today is the barometer measuring a progressively weaker global economy.� U.S. Oil Demand in �08 Expected to be 1 mbd Less than �07 The report states that gasoline/petrol consumption in the U.S. hit �peak demand� in 2007 and was beginning to decline before the economic crisis broke, but �the demand responses were discounted or ignored� in the financial markets where oil is traded. Yet demand was responding to higher prices, except in those parts of the world where retail fuel prices are controlled or subsidized. Total U.S. oil demand in 2008 is expected to be at least one million barrels per day (mbd) less than in 2007. Other industrial countries tell similar stories. The last time demand dropped this much was in the deep recession of 1981. On a global basis, estimates for demand growth from some analysts at the beginning of 2008 were as high as 2.1 mbd of growth, but have fallen dramatically. CERA�s current estimate for 2008 is a decline of almost 300,000 barrels per day and a decline of another 660,000 barrels per day in 2009. The report goes on to say that notwithstanding the weakness in oil demand and prices, oil supply capacity � the difference between total liquids production capacity and actual output � will expand as new supplies, already under development, come to market. That surplus in spare capacity will be a �defining factor� for the oil market. Oil Price Fall �de facto Tax Cut� �The fall in oil prices is a great bounty to hard-pressed consumers midst a global recession, especially to those in which the tax component of retail prices is relatively small,� Yergin said. �If one compares the average U.S. gasoline price in July 2008 ($4.14 a gallon) with October 2008 ($2.26) on an annualized basis, the savings to American consumers are $282 billion (�220 billion, �180 billion). The fall in oil prices is a sort of de facto tax cut � an automatic stimulus package that does not need to be paid for from consumer nation public funds.� The report asks whether the current collapse could be �sowing the seeds of the next oil price spike?� The report concludes that occasional shocks to the global economy and volatility in the oil market will be inevitable in the future, but the extremes from peak to trough of price movements can be moderated. Volatility may be an unintended side effect of periods of �consensus about expected future oil prices� and such periods are characteristic of the industry worldwide. Greater transparency of market information and data about supply and demand, production and investment, and inventory levels represent key initiatives for limiting future volatility in prices and ensuring a more appropriate match over time between supply and demand -- and thus the timely investment that the world economy will need once demand starts growing again. For information about the CERA report, Recession Shock: The Impact of the Economic and Financial Crisis on the Oil Market, send an email to info@cera.com or call +1 617 866 5000. About CERA (www.cera.com) Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, MA, and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo and Washington, DC. About IHS (www.ihs.com) IHS (NYSE:IHS) is a leading global source of critical information and insight, dedicated to providing the most complete and trusted data and expertise. IHS product and service solutions span four areas of information that encompass the most important concerns facing global business today: Energy, Product Lifecycle, Security and Environment. It serves customers ranging from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS has been in business since 1959 and employs approximately 3,800 people in 20 countries. IHS is a registered trademark of IHS Inc. CERA is a registered trademark of Cambridge Energy Research Associates, Inc. Copyright �2008 IHS Inc. All rights reserved.