Oil Prices and the Global Economy

Brittney Barrett  |

President Obama has been trying to push oil prices lower, there’s no denying that, but as has become obvious with  prices topping $112 a barrel today, little progress has been made. Despite a pledge to reduce reliance on foreign oil by one-third, electric cars and domestic oil still feel like a pipedream;  largely, because their integration is expected for next decade rather than next week. The delay; however, may contribute to significant economic endangerment according to reports from Barclay’s today. Yes, consumer spending would become more focused on oil causing retailers to suffer and businesses would have less money for expansion with sky-high energy costs, but that’s just domestically. Oil prices at $150 a barrel, according to a new analysis from Barclays, could contribute to global inflationary increases of three percentage points, weaken global growth by about 0.75% and result in new global-trade imbalances.

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Supply-driven higher energy prices could demand policy changes designed to help lower inflation. A rise in inflation has the potential to affect all areas of business both domestically and globally. An increase in oil prices extreme enough to cause inflation would prompt action on the part of the central bank in the form of rate hikes. Whether or not the hikes would be successful in the inflationary prevention and their effect on economic growth are hazy.

If the inflation is in fact unavoidable, there would be consumer consequences around the world, especially in emerging nations. The Indian economy would slow to a 8.2% growth rate from8.6% last year as a result of the high oil prices and the manner in which that would affect consumer demand.

Overall, developing Asian would expand at a rate of 7.8%, down from 9% last year. China’s economy would not slow much as a consequence of the oil prices, but it too would struggle with attempting to regulate inflation.

The inflation would impact disposable income by making the amount of money currently in people’s bank accounts count for less. As a result they would spend less. Considering 60% of the GDP is generally accounted for by consumption, high inflation is very dangerous. Investments in retail would likely suffer significantly, as would tech companies that rely heavily on the sale of consumer electronics. Tourism and shares of companies that rely on travel; airlines, expedia.com and others of its ilk, as well as places that rely on tourism would all be hard hit.

As a result, if oil prices maintain at current level, there will be a sharp drop off in global growth once prices go past a certain level, that according to Barclay’s is $150 a barrel.

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