Global economy stepping into danger zone

US investment bank Morgan Stanley has forecast oil prices could hit $150 per barrel within the next month. (AFP)

The sharp rise in the oil price into un-chartered territory places the global economy in a dangerous position. Oil prices surged by almost $11 (Dh40.3) a barrel in the United States on Friday, defying predictions they were about to fall and deepening the growing tension between the world's big oil exporters and consuming countries.

As crude oil prices rose by $11 a barrel and reached a record $139 a barrel in New York, the US and the four major Asian economies – Japan, China, South Korea and India, expressed serious concerns on Sunday about the unprecedented surge.

The very high price of oil and petrol prices is creating large problems for economies as a significant recession looms. World leaders are now putting more direct pressure on Opec to increase oil production.

The Opec group of 13 major exporters, who supply about one third of the world's demand, have not formally raised output since 2007, but the group's next planned meeting is not until September. A statement signed by the energy ministers of the US, Japan, China and South Korea, along with a senior Indian official, said: "We share serious concerns over the current levels of oil prices." Action is needed to address the structural supply and demand imbalance in the global oil market.

China's central bank recently announced measures designed to rein in inflation, raising the amount the country's banks must hold in reserve by a full percentage point. The reserve requirement ratio, which is to be lifted in two stages to 17.5 per cent on June 15 and 25, is the fifth increase this year but the first time since December the central bank has opted for more than a half percentage point rise.

The crude oil price has now risen by 44 per cent this year. US investment bank Morgan Stanley has forecast oil prices could hit $150 a barrel within the next month. The irrationality of oil's recent leaps and falls adds fuel to accusations that the price rises are largely the work of market speculators and futures traders.

In the US, the Commodity Futures Trading Commission announced last week that it had launched an investigation into whether there was evidence of manipulation in the wholesale trading of petroleum products. The price surge has been intensified by the weak US dollar.

The impact of the weakening US dollar on the oil price, and Asia's demand for oil, was also evident. Although the trigger for the latest spike appeared largely to be comments from a senior Israeli official regarding the possibility of an attack on Iran, it also came as the US dollar fell following the emergence of higher-than-expected unemployment figures.

Inflation is now increasing rapidly and the threat of stagflation, with falling growth and rising prices, is real. Despite soaring retail prices, the demand for diesel, the mainstay blood fuel of the world economy, continues to rise as countries turn to generators to fill in for failing power grids.

The oil price is having an increasingly high impact on emerging markets. Emerging markets are more affected, particularly in the case of food, but also in the case of energy. These two basic things play a much bigger role in the spending of a typical consumer in poor countries than in the richer countries. The scenario creates social problems as well.

The next few weeks will be crucial for direction. Equities, particularly in the large western markets, will remain volatile. Despite pressure from the oil price, equities in growth areas such as fast-growing economies in Asia, should continue to perform reasonably well. Countries which benefit from the resource boom such as Brazil, Russia and the Gulf states, will remain stronger.

 

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