Oil price rise is another headwind for world economy

Shale oil drill © Getty Images
US shale bottlenecks should ease soon

“There have been threatening developments in the international oil market,” says Roger Bootle in the Daily Telegraph. Prices have soared to $85 a barrel, an increase of 17% since the beginning of August, because of concerns about supply.

US oil sanctions on Iran are about to come into effect and US shale producers have been hampered by supply bottlenecks. As a result, oil output is at multi-decade lows at just 1.24 million barrels a day, down about one million barrels in two years, says Spencer Jakab in the Wall Street Journal.

What effect might an oil price spike have on the world economy? Hedge funds are betting that the oil price will top $100 per barrel in 2019, as Carl Mortished points out in the Evening Standard. If Brent stood at $100 a barrel throughout 2019, fuel would cost consumers in advanced economies an extra 0.3% of annual household spending, according to Simon MacAdam of Capital Economics. It would “not deal a big blow to global growth”, but it would exacerbate current account pressures in some emerging markets. Meanwhile, inflation in OECD economies “would be a percentage-point or so higher over the next year”.

If oil prices drive inflation higher, this will reinforce concern over bond yields. “In the past, significant oil price rises have both increased inflation and depressed real output,” says Bootle. “Indeed, twice in the seventies big rises in oil prices sent the world economy into a serious recession.” For now, however, inflation is “subdued” and oil has less of an impact on GDP as we have become more efficient at using it and services have become more important to GDP than industry. Prices may slip back in any case as US shale bottlenecks ease. Meanwhile, however, this is another headwind for the global economy.