Oil at $100 set to aggravate inflationary shock to global economy
It’s a worrying combination for the US Federal Reserve and other central banks as they seek to contain the strongest price pressures in decades without derailing the post-pandemic recovery.
London futures jumped 3.3% as the dramatic escalation of the Ukraine crisis in Russia raised fears of a disruption in the region’s critical energy exports.
While energy exporters stand to benefit from the boom and the influence of oil on economies is no longer what it used to be, much of the world will suffer the consequences, as businesses and consumers will see their bills increase and their purchasing power weighed down by more expensive food, transport and heating.
“The surge in oil prices will intensify pressure on central banks around the world to advance their tightening cycle and raise rates more aggressively to contain inflation risks,” said Chua Hak Bin, an economist. senior at Maybank in Singapore.
More broadly, JPMorgan Chase & Co. warns that a rise to $150 a barrel would nearly halt the global expansion and drive inflation to over 7%, more than three times the rate most policymakers are aiming for. monetary policy.
Oil surged with a broader rise in commodity prices which also swept away natural gas. Among the drivers: A post-lockdown resurgence in global demand coupled with geopolitical tensions and strained supply chains. Prospects for a renewed Iranian nuclear deal have sometimes cooled the market.
Still, the rise has been piercing. Just two years ago, oil futures prices dipped briefly below zero.
Fossil fuels – oil, along with coal and natural gas – provide more than 80% of the energy of the global economy. And the cost of a typical basket of them is now up more than 50% from a year ago, according to Gavekal Research Ltd., a consultancy.
The energy crisis also compounds the continued compression of global supply chains, which has driven up costs and delayed deliveries of raw materials and finished goods.
The International Monetary Fund recently raised its forecast for global consumer prices to average 3.9% in advanced economies this year, compared to 2.3% and 5.9% in emerging and developing countries.
China, the world’s largest oil importer and exporter of goods, has so far benefited from benign inflation. But its economy remains vulnerable as growers already juggle high input costs and concerns about energy shortages.
With price pressures proving more tenacious than expected, central bankers are now prioritizing fighting inflation over supporting demand. US consumer prices, which hit a four-decade high, sent shocks through the system, raising bets that at one point suggested the Fed would hike rates up to seven times this year , a faster pace than expected.
Bank of England Governor Andrew Bailey partly justified the decision to raise UK interest rates by pointing to “compression in energy prices”. they signal a turn towards tightening. The Reserve Bank of India also flagged oil prices as a risk.
To be sure, the global economy is no longer the oil-intensive consumer it was in previous decades, particularly the 1970s, and alternative energy provides some buffer. Other pandemic-era insulators include swelling household savings and rising wages in a tight labor market.
In the United States, the emergence of the shale oil industry means that its economy is less vulnerable to oil shocks: while consumers pay more for gasoline, domestic producers earn more.
Other oil producers will also have cause for celebration.
In an analysis of the winners and losers of the oil boom, Bloomberg Economics says Saudi Arabia can expect a windfall, Russia gains, while smaller oil exporters like the United Arab Emirates lose out. come out better too. The biggest losers would be energy importers such as Korea, India and Japan.
Paul Donovan, UBS Group AG’s chief economist for global wealth management, said it’s important to look at how oil-producing economies spend their extra income, which could ultimately contribute to global growth. “These days, oil sellers are very keen on spending the revenue they get when prices go up,” Donovan said in a video presentation to clients.
For most consumers and central bankers, a lot depends on how fast and how far energy travels, especially if economies lose momentum globally.
A big enough oil shock could derail many central banks’ normalization plans, JPMorgan economists say “although the high inflation backdrop and concerns about entrenched inflation expectations mean policy would be even tighter than if inflation was currently low”.
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