The global economy is travelling on a knife edge, with spiralling oil prices – which have fuelled an economic boom across the Middle East – threatening to transform into a curse, economists predict.
With crude prices up 45% in the past year, top economists and investors say $70 a barrel levels are unsustainable. Stephen Roach, chief economist at Morgan Stanley, told Emerging Markets energy prices could soon peak and will return to around $40. Mark Mobius, emerging markets guru at Templeton Investments agreed but noted that
producers have no cause for alarm:
“Even at $40 a barrel, you’re still making an awful lot of money,” Mobius pointed out.
Indeed, a drop in prices could be a benefit for oil economies if the alternative is an end to global growth which would be felt among producers and consumers alike. “There is a very real risk of higher oil prices feeding into a global recession,” but “it is not clear where the tipping point is,” said Steve Poloz, chief economist at Ottowa-based Export Development Canada (EDC).
“The last tipping point was in the late 1970s, with the Iranian revolution, after which there was a severe global downturn,” commented Mark Berrisford-Smith, senior economist at HSBC Bank. Calling the next slump is highly problematic, he conceded: “We will know the new tipping point only when it happens”.
So far the world economy has responded well to rocketing oil costs: the US, Japan, Germany and China – all of them big energy importers – are enjoying robust growth. However, after remaining in abeyance for years, the spectre of inflation is beginning to rear its head. Signs of a pick-up in American price growth earlier this month prompted a rout in global markets.
“Last year all the major economies showed an impressive ability to sustain high oil prices, this year it’s more problematic,” said Brian Hilliard, director of research at Societe Generale. “The fundamentals do suggest a lower oil price,” he commented, noting that speculation will continue to buoy crude costs in the short term.
Mohammed Barkindo, acting secretary-general of the Organization of Petroleum Exporting Countries, hinted at a similar expectation on 19th May, suggesting that oil prices will drop, but only after the standoff between Iran and the international community over the nuclear issue is resolved.
“Prices will not fall until this anxiety abates,” he said.
While OPEC members have clearly profited from the price surge – doubling revenue between 2003 and 2005 – a moderation would be far better news than a global recession. And the chances of declines even approaching levels that would make life difficult for producers seem extremely remote.
“We believe oil prices will now stay at the higher level,” said Mohammad Jafar Mojarrad, vice governor (foreign exchange affairs) of the central bank of Iran, which “budgeted at $40 a barrel in the last Iranian year and prices averaged $50, and they will be higher this year.”