Oil is now in a bull market, believe it or not. Prices of the world’s most important commodity has climbed by more than a quarter in recent days.
That leaves Brent crude up by nearly $US10 per barrel from its lows, up to around $US57. It also means tumbling petrol prices are over (for now) – US gas prices rose for the first time in 17 weeks. But at least one economist believes this is a “Goldilocks” scenario which could be the “perfect outcome” for the world.
Julian Jessop at Capital Economics gives three big reasons that he thinks the recent surge may be good news:
1.) At $US60 or $US70, there’s less chance of a “meltdown” in the energy sector. Major oil producers like Russia and Venezuela are already struggling with tumbling prices, but it’s hard to say what the right trade-off is: Lower prices mean cheaper fuel, but might also mean higher geopolitical and social instability.
2.) Even if oil ticks up a bit, lower prices should still add to global growth. Here’s Jessop:
$US60 to $US70 would still be substantially lower than the average of $US110 prevailing in the three and a half years from 2011 to mid-2014, when the global economic recovery was weak and uneven. This would provide a substantial boost to net oil consumers, which include most of the world’s large advanced and emerging economies. Even allowing for the damage to producers, this could easily add 0.5% to world GDP growth both this year and next.
3.) There’s a bit less of a chance of a deflationary spiral. Jessop notes that whether oil settles at $US40 or $US60 per barrel, energy prices are going to weigh heavily on inflation across the advanced economies. But there will be less of an effect if it settles higher. Economists are worried about consumers and businesses getting stuck in a deflationary mindset (so employers expect lower incomes and offer lower wages, deepening the deflation further). From that perspective, a smaller drop in prices for a briefer period of time is preferable.
Capital Economics are expecting an oil price recovery to about $US60 this year, and $US70 over the next couple of years:
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