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October 24, 2014 - Latest:

Brent crude has hit over $124 per barrel

  • 24 February 2012

The current price rise has been driven by the posturing in Iran: "Oil prices have jumped to an eight-month high following Iran's ban on exports to the UK and France. Iran, the world's fifth-largest oil exporter, halted sales to the two countries on Sunday in retaliation against tightening EU economic sanctions over its disputed nuclear programme."

But there are other factors at work. Notably, stronger growth in the US, disruption to supply in Nigeria and speculation are also having an impact. Theoretically, the price should not be rising in climate of teetering growth – such as is being seen at the moment across Europe – because demand should fall away. The current situation is the worst of all possible worlds; rising energy prices in a weak global economic climate.

The rise is undoubtedly bad news for economic growth. This piece was written at the time of the last oil price spike (in March 2011) and warned:  "As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years." This is a hit developed market economies can ill-afford and would throw out their austerity projections.

President Obama's aides have admitted to concerns over the oil price. White House officials are keeping an increasingly wary eye on oil prices, worried that an election-year spike in the cost of gasoline could dampen consumer confidence and quash President Barack Obama's recent economic and political gains….Obama aides say that even with the payroll tax cut extension, the threat of higher gas prices striking while the economy is recovering moderately has created anxiety in the White House."

In other words, the higher oil price could threaten his re-election chances – in this piece, Jim Tankersley, Economics Correspondent for the National Journal, points out that high oil prices have influenced the outcome of elections before: (While) there's not a lot of deep research suggesting that any one president has lost his job because of high gas prices, there is some evidence that it has played a factor. Probably the best known example is Jimmy Carter. Gas prices spiked in 1979 over the Iranian hostage crisis and he had this, you know, the famous malaise that America's economy was going through, which allowed President Reagan, then Governor Reagan, to use to defeat President Carter in 1980."

Obama has been quick to emphasise the increase in domestic production of oil, but as Dean Baker says in this blog, the United States currently produced around 6 million barrels a day. The world market for oil is a bit less than 90 million barrels a day. Increased domestic production in the US goes very little way to counter-balancing the burgeoning demand from China. 

But, while there are some scary predictions about, it would be wrong to suggest that oil prices will inevitably stay high: "Goldman Sachs, a well-regarded commodities forecaster, suggested in December, when the price was $111, that Brent crude could rise as high as $135 in 2013 and $127.50 in 2012. Sceptics pointed to a prediction by Goldman analysts in May 2008 that oil could hit $200 within six months, only to see it fall to $40 by the end of the year."

The oil price can often be self-regulating: Economic growth goes up, the oil price rises, thereby dampening economic growth, which leads it to fall back down again. If prices remain high, it will certainly act as a tailwind to global recovery and may even tip some countries into recession. However, its influence is not deterministic – there are other, more profound, forces at work.  

 

More from Mindful Money:

The Commodities Bubble: Explained

Why the current rise in the price of crude oil could have a more powerful economic effect than expected

What are the effects of an oil price rise?

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