Markets remain sanguine about record high oil prices, even as they yesterday breached the psychological barrier of $50 a barrel for the second time this week.
"We have a lot more things to worry about than the price of oil," says Bill Dudley, chief US economist at Goldman Sachs, referring to structural weaknesses in the US economy. US crude oil futures have soared by more than 50% this year, hitting a record of $50.47 on Tuesday and staying around the $50 mark since.
Even so, as Dominic Wilson, senior global economist at Goldman Sachs, points out: "The market is remarkably relaxed. There's clearly some risk, but there's a fairly benign response right now in the way it's being digested."
Dudley says that the recent price rise is less significant than in the past. "Remember that in 1973 and 1981 the oil shocks were much bigger than they are now," he says. They involved a more than six-fold increase in oil prices, compared to the recent surge which has seen the price only double, he says.
There are now fears that oil prices will hit $60 a barrel. But the impact of such prices on the global economy may be exaggerated. "People are so sensitive to oil prices and think that high oil prices lead to recession, but only because the two are correlated" says Dudley. "The question is whether its correlation or causation. We're not that confident that we can understand fully the transmission channels from oil price changes to economic growth."
IMF Managing Director Rodrigo Rato said yesterday that Fund analysis shows that "a $5-dollar-a-barrel increase in the medium term in a year has an effect of around 0.3% in growth."
Some G7 officials are raising concerns over market fundamentals, suggesting the surge in oil prices is due not only to speculation, but also because of structural reasons related to over-estimated levels of supply.
OPEC, however, has sought to ease such worries: "OPEC has been addressing problems associated with supply and demand, and will continue to do so. At the same time, we recognize that the current situation is not caused by market fundamentals," says Purnomo Yusgiantoro, secretary-general of the oil exporting club, who adds that his members can increase supply if required.