How $100 a barrel oil would affect global economy

Surging crude prices are posing another headwind for the world economy after US President Donald Trump’s “zero” pledge on Iran oil sales. Brent crude has risen about 33 per cent this year and is close to the highest in six months. While higher prices owing to strong demand typically reflects a robust world economy, a shock from constrained supply is a negative. Much will depend on how sustained the spike proves to be. Exporting nations will enjoy a boost to corporate and government revenues, while consuming nations will bear the cost at the pump, potentially fanning inflation and hurting demand. Ultimately, there comes a point where higher prices may be damaging to everyone. The impact will vary. Rising oil prices will hurt household income and spending and it could accelerate inflation. As the world’s biggest importer of oil, China is vulnerable, and many countries in Europe also rely on imported energy. Seasonal effects will also have an impact. With the Northern Hemisphere summer approaching, consumers can switch energy sources and scale back usage. A slowing world economy will also hurt demand and by extension keep a lid on prices. For a sustained hit to growth, economists say oil would need to hold above $100. It also depends on dollar strength or weakness, given crude is priced in greenbacks. Analysis by Oxford Economics found that Brent at $100 per barrel by the end of 2019 means the level of global gross domestic product would be 0.6 per cent lower than currently projected by the end of 2020, with inflation on average 0.7 percentage points higher. “We see increased risks of significantly higher oil prices,” Oxford economists John Payne and Gabriel Sterne wrote in a note. “In the short run, it is likely the supply impact will be offset by higher production elsewhere, but the market is tightening and all it would take is one more shock to supply and oil could reach $100.” An upending of global oil trade around the Iran-Trump spat could continue to have a sizeable impact on financial markets, as the affected supply is as much as 800,000 barrels per day. Uncertainties around availability have already whipsawed oil markets. And the political sensitivities of these developments have other markets bracing for volatility. Mr Trump has pledged to help, alongside Saudi Arabia and the UAE, those needing to shift orders from Iran to another supplier. But US claims that its domestic supply can help offset the loss are a high bar to meet, given that the daily American output for similar crude is about a quarter of Iran’s. Emerging economies dominate the list of oil-producing nations, which is why they are affected more than developed ones. The increase in revenues will help to repair budgets and current account deficits, allowing governments to increase spending that will spur investment. Winners include Saudi Arabia, Russia, Norway, Nigeria and Ecuador, according to analysis by Nomura. Those emerging economies nursing current account and fiscal deficits run the risk of large capital outflows and weaker currencies, which in turn would spark inflation. That in turn will force governments and central banks to weigh up their options: raise interest rates even as growth slows or ride it out and risk capital flight. Nomura’s losers list includes Turkey, Ukraine and India. While US oil producers try to take advantage of any sales boost from customers moving away from Iran, the broader US economy won’t necessarily see benefits with oil price tags as high as $100 per barrel. It would be a squeeze on American consumers forming the backbone of still-steady economic growth. Prices at the petrol pump already have risen more than 7 per cent this month to $2.89 per gallon, which could weigh on retail sales that jumped in March by the most since 2017. And if things go awry in global oil markets, there is risk that political blame shifts back to the US for the sanctions, which could mean backlash via investment or other channels that threaten economic stability. Because energy features prominently in consumer price gauges, policymakers look to core indexes that remove volatile components. If the run-up in prices proves to be substantial, and sustained, those costs will filter through to transportation and utilities. Led by the Federal Reserve, central banks around the world have taken a dovish tilt as the absence of inflation allows policymakers to shift their focus to slowing growth. That is unlikely to quickly change. The International Monetary Fund this month lowered its global growth forecast and said the world is in a “delicate moment".