Oil prices are surging. When do they begin seriously harming the global economy?
That’s a subject of the latest BAML Global Energy Paper.
Oil above $115/bbl could put the global economy at risk
We have long argued that oil would break through $100/bbl in 2011. But with higher global economic growth and inflation expectations for 2011, our analysis now suggests that Brent crude oil prices would have to average about $115/bbl this year, and $130/bbl next year to bring global energy demand to 9% of GDP. Among the factors that are pushing this “oil threshold” higher is: (1) much lower US natural gas prices, (2) lower refining margins, and (3) a rapidly expanding global nominal GDP in USD, a function of real economic growth, global inflation and FX moves.
Several countries appear vulnerable to rising oil prices
Net energy importers in EMs, like China and India, are likely to suffer with oil prices pushing higher. These countries would likely endure some pain if crude oil prices were to spike significantly above our expectations. Already at the current spot prices, both countries have seen the size of their energy sector move quite close to the 2008 peaks. Korea and Indonesia are also large and growing energy
consumers where high energy prices are pushing up the size of the sector, way beyond what has been sustainable previously. Turkey is another country that will likely struggle if oil prices mount above $100/bbl. Brazil will likely see a decline in its trade balance as it is still a net importer of energy. The GCC region (Gulf Cooperation Council of the Persian Gulf) or Russia of course benefit from high
energy prices given that they are net oil exporting countries.
Who isn’t harmed as much by rising prices? The wealthy west:
The US seems less vulnerable to oil, thanks to low nat gas
If oil instead broke unexpectedly to a $120-130/bbl range, pretty much every net energy importer, including Germany, Japan, China and other parts of Asia, would be hurt, in our view. The simple quantitative analysis shown below roughly coincides with the qualitative assessment from a poll of our economists. Perhaps surprisingly, the US is somewhat less vulnerable. We estimate that the energy sector now represents 5.4% of the US economy, relative to 7.6% in 2008 and 10.6% in 1980. The vulnerability of the United States has decreased partly as a result of efficiency improvements but, most critically, due to the substantial decoupling in domestic natural gas and thermal coal prices from the
Though obviously the impact is real.
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