Crude Oil at $100 bbl and the World’s Economy: Who Wins, Who Loses
$OIL, $USO, $UGA
Crude Oil prices are now begetting forecasts of a return to $100 bbl for the 1st time since Y 2014, creating both winners and losers in the world economy.
Exporters of Black Gold would enjoy bumper returns, giving a fillip to companies and government coffers. By contrast, consuming nations would bear the cost at the pump, potentially fanning inflation and dampening demand.
Crude Oil at $100 would mean less for global growth in Y 2018 than it did after the Y 2011 spike because economies are less reliant on energy and because the shale revolution cushioning the US
A lot depends on why prices are driving higher.
A shock due constrained supply is a negative, but 1 due to robust demand just reflects solid growth. These 2 forces are now in play, driving ICE Brent Crude Oil price up about 22% YTD.
Higher Crude Oil prices would hurt household incomes and consumer spending, but the impact would vary. Europe is vulnerable given that many of the region’s countries are oil importers. China is the world’s biggest importer of Crude Oil and could expect an uptick in inflation.
There are also seasonal effects
With winter looming in the Northern Hemisphere, consumers can switch energy sources to keep costs down, such as biofuels or Nat Gas, although not quickly. Indonesia already has instituted measures to push more use of biofuels and limit the economy’s reliance on imported fuel.
For a sustained hit to global growth, economists say Crude Oil would need to hold above $100. The USD’s gain of this year does not help though given Crude Oil is priced in USDs.
Some economists believe that $100 Crude Oil will do more harm than good to global growth, and there are important differences in the condition of the world economy today compared with Y 2011.
The shale revolution, lower energy intensity, and higher general price levels mean the impact will be smaller than it once was, and the price will have to go much higher before global growth slips.
Geopolitics is a wild card.
Renewed US sanctions on Iran are already crimping Iran’s Crude Oil exports. While President Donald Trump is pressuring the Organization of Petroleum Exporting Countries (OPEC) to pump more, there is limited spare production capacity. In addition, supply from nations including Venezuela, Libya and Nigeria is being buffeted by economic collapse or civil unrest.
The Winners: Most of the biggest Crude Oil-producing nations are emerging economies. Saudi Arabia leads the way with a net Crude Oil production that’s almost 21% of GDP as of Y 2016, more than 2X that of Russia, which is the next among 15 major emerging markets ranked. Other winners could include Nigeria and Colombia. The increase in revenues will help to repair budgets and current account deficits, allowing governments to increase spending that will spur investment.
The Losers: India, China, Taiwan, Chile, Turkey, Egypt and Ukraine are among the nations who would take a hit. Paying more for Crude Oil will pressure current accounts and make economies more vulnerable to rising US interest rates.
A run-North in Crude Oil prices poses a lot less of a risk to the US than it used to, thanks to the boom in shale oil production. The old rule of thumb among economists was that a sustained $10 bbl increase would shave about 0.3% off of US output the following year. But tallies now see a hit of around 0.1%.
Energy prices often carry a heavy weight in consumer price gauges, prompting policy makers including those at the Fed to focus simultaneously on core indexes that remove volatile energy costs. But a substantial run-up in Crude Oil prices could provide a more durable uptick for overall inflation if the costs filter through to transportation and utilities.
So, if stronger Crude Oil prices boost inflation, central bankers on balance will have 1 less reason to keep monetary policy loose.
Among the most-exposed economies
Central bankers in India already are warning about the impact as the nation’s biggest import item gets more expensive. Greater overall price pressures also could prompt faster monetary policy tightening in economies such as Thailand, Indonesia, the Philippines and South Africa.
Have a terrific week
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