What Oil At $100 A Barrel Would Mean For The Global Economy

Saturday, October 13, 2018 /09:07PM / FDC

Rising oil prices are prompting forecasts of areturn to $100 a barrel for the first time since 2014, creating both winnersand losers in the world economy. Exporters of the fuel would enjoy bumperreturns, giving a fillip to companies and government coffers. By contrast,consuming nations would bear the cost at the pump, potentially fanninginflation and hurting demand. The good news is that Bloomberg Economics foundthat oil at $100 would mean less for global growth in 2018 than it did afterthe 2011 spike. That’s partly because economies are less reliant on energy andbecause the shale revolution cushioning the U.S. Ultimately, much depends onwhy prices are pushing higher. A shock amid constrained supply is a negative,but one due to robust demand just reflects solid growth. Both forces are now inplay, driving Brent crude up about 22 percent this year.

What does it mean for globalgrowth?

Higher oil prices would hurt household incomes andconsumer spending, but the impact would vary. Europe is vulnerable given thatmany of the region’s countries are oil importers. China is the world’s biggestimporter of oil and could expect an uptick in inflation. There are alsoseasonal effects to consider, with winter looming in the Northern hemisphere.Consumers can switch energy sources to keep costs down, such as biofuels ornatural gas, although not quickly. Indonesia already has instituted measures topush more use of biofuels and limit the economy’s reliance on imported fuel.For a sustained hit to global growth, economists say oil would need to holdabove $100. The dollar’s gain of this year doesn’t help though given crude ispriced in greenbacks.

How can the world economy absorb oilat $100?

Bloomberg Economics found that $100 oil will domore harm than good to global growth. Yet there are important differences inthe condition of the world economy today compared with 2011.

“The shale revolution, lower energy intensity, andhigher general price levels mean the impact will be smaller than it once was,”economists led by Jamie Murray wrote in a recent report. “The price of a barrelwill have to go much higher before global growth slips on an oil slick.”

How will Iran and Trump impact themarket?

Geopolitics remains a wild card. Renewed U.S.sanctions on Iran are already crimping the Middle East nation’s oil exports.While President Donald Trump is pressuring the Organization of PetroleumExporting Countries to pump more, there is limited spare production capacity.In addition, supply from nations including Venezuela, Libya and Nigeria isbeing buffeted by economic collapse or civil unrest. Still, Goldman Sachsanalysts predict $100 will not be passed.

Who wins from higher oil prices?

Most of the biggest oil-producing nations areemerging economies. Saudi Arabia leads the way with a net oil production that’salmost 21 percent of gross domestic product as of 2016 -- more than twice thatof Russia, which is the next among 15 major emerging markets ranked byBloomberg Economics. Other winners could include Nigeria and Colombia. Theincrease in revenues will help to repair budgets and current account deficits,allowing governments to increase spending that will spur investment.

Who loses?

India, China, Taiwan, Chile, Turkey, Egypt andUkraine are among the nations who would take a hit. Paying more for oil willpressure current accounts and make economies more vulnerable to rising U.S.interest rates. Bloomberg Economics has ranked major emerging markets based onvulnerability to shifts in oil prices, U.S. rates and protectionism.

One of the biggest winners might also find itselfon the losing end: Oystein Olsen, Norway’s central bank governor, warned thatwestern Europe’s biggest petroleum producer risks problems if the industrytakes its eyes off controlling costs.

What does it mean for the world’sbiggest economy?

A run-up in oil prices poses a lot less of a riskto the U.S. than it used to, thanks to the boom in shale oil production. Theold rule of thumb among economists was that a sustained $10 per barrel increasewould shave about 0.3 percent off of U.S. output the following year. Buttallies now, including that of Moody’s Analytics chief economist Mark Zandi,pencil in a hit of around 0.1 percent.

While the diminishing American reliance on importedoil has positive economic consequences at the industry level, poorer householdswould feel the weight of higher prices at the pump. They spend about 8 percentof their pre-tax income on gasoline, compared to about one percent for the topfifth of earners.

Will it lead to higher inflationaround the world?

Energy prices often carry a heavy weight inconsumer price gauges, prompting policy makers including those at the FederalReserve to focus simultaneously on core indexes that remove volatile energycosts. But a substantial run-up in oil prices could provide a more durableuptick for overall inflation if the costs filter through to transportation andutilities.

What does it mean for central banks?

If stronger oil prices boost inflation, centralbankers on balance will have one less reason to keep monetary policy loose.Among the most-exposed economies, central bankers in India already are warningabout the impact as the nation’s biggest import item gets more expensive.Greater overall price pressures also could prompt faster monetary policytightening in economies such as Thailand, Indonesia, the Philippines and SouthAfrica.

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