Surge in oil prices poses threat to global economic recovery
31 March 2011
The surge in oil prices poses a threat to the fragile global economy, the International Energy Agency’s Chief Economist, Dr. Fatih Birol, has said.
A rising oil price represents a wealth transfer from oil importing to exporting countries. This will have an impact on the balance of payments for countries. (This is essentially a country’s bank statement, which shows all transactions with other countries throughout the world). With importing countries spending more on oil, the balance on their accounts can be badly affected.
Rising oil prices will also drive up inflation as the cost of oil has a knock-on effect on many other products, such as transport fuels and food.
While energy-producers stand to gain, high prices will put downward pressure on global economic growth which is in nobody’s interest in the longer-term, he explained at a meeting in Paris on 22 March.
“The overall impact will depend largely on the extent of the price increase, its persistence, monetary policy response, and how producers spend their windfall revenues,” he added.
Oil prices began rising significantly in September 2010. By early March Brent crude was trading at around USD115 a barrel, while the WTI was around USD100 a barrel.
On a positive note, he observed that the world on average is now using half as much oil per unit of Gross Domestic Product (GDP) – a country’s annual economic output – than compared with 1971.
This shift is due to efficiency improvements in how energy is consumed, as well as changes to the structure of economic output.
The consequence of the efficiency savings as well as less economic reliance on energy means that prices of products – though affected – are not affected by a hike in oil prices as much as four decades ago.
Despite this change, Dr. Birol stressed that oil prices still affect the global economy, with countries with high import dependency the most vulnerable.
He added that “spikes in the price of oil have played a role in each global recession since the early 1970’s.”
If oil prices average USD100 a barrel through all of 2011, the amount spent on oil imports by OECD countries will amount to 2.3% of the region’s GDP.
For each further USD10 increase in the cost of a barrel of oil, spending rises by 0.2% of GDP of OECD countries.
“If high prices remain, then the amount spent on oil by the big importing OECD nations will be more or less equal to what they spent in 2008, when the world was plunged into an awful economic crisis,” Dr. Birol said.
Looking at China, if the price of oil averages USD100 a barrel this year, China will have to spend USD206 billion on oil imports in 2011 – over USD50 billion more than it did last year – which will add to inflationary pressures.
Yet, while high oil prices are having an obviously negative impact on importing countries, exporting nations are benefiting.
IEA analysis indicates that if oil prices stay above USD100 a barrel on average for the full year, OPEC oil export revenues are set to exceed USD1 trillion in 2011 – a record high.
Similarly if prices remain high, Russia is set to earn USD355 billion in oil and gas export revenues, which exceeds 20% of its GDP.
Photo: Oil rig and chain link fence. © GraphicObsession
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