Transcript Another Oil Shock? - Lowy Institute for International Policy

InternatIonal Economy Watch
20 May 2004
Another Oil Shock?
• Sharp run-ups in the price of oil tend to be bad news for the global economy. The big oil price
shocks of the 1970s were an important contributory factor to the stagflation (the poisonous
combination of high unemployment and high inflation) that bedeviled the world during that period.
More recently, oil price increases in 1990 and 2000 were associated with a slowdown in global
economic activity. With prices breaching US$40 per barrel this month, is the world about to suffer
another major oil shock?
• The current rise in prices is certainly unhelpful for global growth. But at present levels it is unlikely
to be sufficient, at least on its own, to derail the world economy. Higher oil prices impinge on
activity through several channels including the transfer of income from oil consumers to oil
producers; changes in the cost of production of goods and services; the impact on overall prices and
inflation; and the knock-on effect on financial markets. Taking all of these influences into account,
the IMF estimates that a US$5 per barrel increase in the price of oil translates into a 0.3% reduction
in global growth.* Moreover, in inflation-adjusted terms, oil prices are still well below earlier peaks.
Oil price
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• Interestingly, as recently as last year the market consensus seemed to be that the price of oil was set
for a sustained decline over the medium term. What changed? On the supply side, there has
probably been an increase in the risk premium based on a perceived increase in the threat of
disruption to Middle East supplies. But an even bigger part of the story appears to be on the demand
side, where there has been a surge in energy consumption, particularly in China and other economies
in emerging Asia. Finally, the structure of the oil market itself may also be a contributory factor. A
relatively low level of spare production capacity, combined with a trend decline in commercial oil
inventories, has boosted market volatility.**
* The impact of higher oil prices on the global economy. IMF (2000)
** Economic prospects and policy issues. Chapter 1 in World Economic Outlook April 2004. IMF (2004)
MARK P THIRLWELL – Program Director
Tel: +61 2 9358 7126
[email protected]
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Source: http://research.stlouisfed.org/fred2/series/OILPRICE/98/Max
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