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The prominent features of the global economy in 2008 will be oil and energy issues, a U.S. dollar that is weakening yet becoming more important and a strong performance by the U.S. economy. This is one section of the Annual Forecast 2008.

The prominent features of the global economy in 2008 will be oil and energy issues, a U.S. dollar that is weakening yet becoming more important and a strong performance by the U.S. economy.

Oil prices finally will fall in 2008. Much of the price buildup in recent years has been the result of geopolitical risk introduced by Iran war scares, the occupation of Iraq, Nigerian domestic politics, Venezuelan seizures, piracy in the Strait of Malacca, the war against al Qaeda and Russia’s energy policy.

The world has changed. Iran is moving toward an agreement with the United States on Iraq, Nigerian politics have calmed, the market has priced in Venezuelan nationalism, states in the Malacca region have managed to get piracy under control and al Qaeda’s operations have been sequestered in the Afghan-Pakistani border region. The only wild card remaining in 2008 is the Russians, who could limit their exports of oil and natural gas as part of Moscow’s struggle with the West. However, since such restrictions would impact Russia’s own exports, any geopolitical impact on energy prices in 2008 is unlikely.

The expected downward trend in oil prices will not carry over to other commodities, such as food and minerals. The price increases of these products in recent years are the result of rising and more varied demand — such as the new biofuels industry’s increasing need for crops. There is no reason to expect such demand to falter, and there are no new supplies of any minerals expected to come on line that might be large enough to cause prices to substantially drop. The one exception could be foodstuffs, whose supply in large part is determined by the weather (something we do not attempt to forecast).

While energy prices will moderate in 2008, there will not be a collapse. Since the declines will be relatively mild and since most oil exporters have managed to save up vast sums, very few producers will suffer any substantial financial stress. In fact, nearly all oil producers will continue to accrue near-record amounts of income, stabilizing them politically and economically despite the moderate downturn in prices. The two countries to watch are Argentina and Venezuela, which both have been spending their petroleum income as fast as it has come in, and whose lack of long-term investment in production has resulted in steady output drops in output for years.

Yet there is another aspect to this equation. Prices have been strong since 2003 and have given rise to a major trend that will surge forward in 2008: the steady deliberalization of the energy sector.