Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
An account already exists for this email address, please log in.
Oil is close to a tipping point
The rising price of oil threatens to sink the still-fragile global economy.
It's "dj vu all over again", says Bank of America Merrill Lynch (BAML). Last year, the run-up in oil prices amid the Arab Spring threatened to choke off global growth. This year's oil price surge is another "unambiguous negative".
Oil futures have hit a nine-month high of $126 a barrel, while in euro and sterling terms, black gold is at record peaks of around €94 and £80. The dollar record, set in 2008, is $146. The tight market and the prospect of war between the West and Iran, and the latter's threat to block the Strait of Hormuz, through which a fifth of the world's daily oil supply is shipped, have boosted prices by 17% this year in dollar terms.
The EU has already imposed an oil embargo on Iran. Throw in other disruptions in Nigeria and the Sudan, and the overall threat of supply shocks is the most severe since the Iranian revolution in 1979, reckons Deutsche Bank.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
As James Hamilton of the University of California in San Diego points out, all but one of the 11 postwar recessions in America were associated with an increase in the price of oil. A key problem is the impact of higher petrol prices on consumers. Four dollars a gallon is a level widely deemed damaging to consumer confidence, and prices have risen to $3.70, a February record. David Rosenberg of Gluskin Sheff notes that consumers have already cut back on energy use at the fastest pace in 15 years.
However, the worst impact of the oil squeeze is likely to be on Europe. BAML says that a $10 increase in the oil price has typically cut growth in consuming nations by 0.1%-0.5%, with the bias towards the lower end of the range in more recent studies as economies have become more energy-efficient. But that sort of dent to growth is enough to tip much of Europe, already in or close to recession, below the zero line.
There is no "magic number" at which oil begins seriously to hurt economies, notes BAML. But the West is hardly in robust shape in any case, as it is weakened by post-credit-bubble deleveraging and an injured banking system. So with little prospect of prices sliding sharply anytime soon, it's a safe bet, as Michael Lewis of Deutsche Bank puts it, that oil is "moving towards the tipping point".
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
