High oil prices pose threat to global economic recovery

5 January 2011

The stability of the global economy is under threat due to oil prices entering a “dangerous zone,” according to the IEA’s Chief Economist, Fatih Birol.

Dr Birol’s warning follows new analysis from the IEA which found that oil import costs for member countries of the Organisation for Economic Co-operation and Development have shot up by $200 billion to $790 billion at the end of 2010.

The IEA analysis finds that this increase, triggered by high oil prices, is equal to a loss of income of 0.5 per cent of the OECD countries combined gross domestic product.

Wake-up call

“Oil prices are entering a dangerous zone for the global economy” warns Dr Birol. “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”

Despite a dip yesterday, oil prices have been climbing steadily in recent weeks, pushing close to $100 a barrel. On Monday Brent Crude reached $95 a barrel, its highest price for over two years, while the WTI price hit $89, up from $79 this time last year.

The analysis from the IEA, an energy policy advisor for its 28 member countries and beyond, also found that the European Union’s oil import bill grew by $70 billion last year. This figure is equal to the combined budget deficits of Greece and Portugal. 

Exploring oil alternatives

This trend for higher prices, Dr Birol argues, stresses the need for oil consuming countries to boost efforts to cut back on the amount they use, especially for transportation.

“It is not in the interest of anyone to see such high prices,” he adds. “Oil exporters need clients with healthy economies but these prices will sooner or later make the economies sick, which would mean the need for importing oil will be less.”

Dr Birol suggests that in the short term “it may not be a bad idea that the producers are ready to increase production and show their understanding that these high prices are not good for the global economy.

Factbox: What will shape the future of oil?
The World Energy Outlook 2010, the IEA’s flagship publication, shows that the global outlook for oil remains highly sensitive to policy action to curb rising demand and emissions. In the Current Policies and New Policies Scenarios, global primary oil use increases in absolute terms between 2009 and 2035, driven by population and economic growth, but demand falls in the 450 Scenario in response to radical policy action to curb fossil-fuel use. The oil price needed to balance oil markets is set to rise, reflecting the growing insensitivity of both demand and supply to price. The growing concentration of oil use in transport and a shift of demand towards markets where subsidies are most prevalent are limiting the scope for higher prices to choke off demand and discouraging fuel switching. At the same time constraints on investment mean that higher prices lead to only modest increases in production. In the New Policies Scenario, the average IEA crude oil price reaches $113 per barrel (in year-2009 dollars) in 2035 – up from just over $60 in 2009.

Click here to read more about the World Energy Outlook