Monday 22 August 2011

Gaddaffi affect on oil prices could be crucial

 Brent Crude Oil

It is an oft quoted economic statement that a $1 dollar rise in the price of oil adds 0.1% to inflation over 2 years. The Libyan war added approximately 20% to the price of oil overnight. This has coincided with a very weak patch of the world economy.

There are many current parallels to 2008 at the moment; volatile markets, banks in trouble, leverage and debt issues to the fore and a macro economic collapse possible.

However, the role of the price of oil is not to be underestimated. In 2008 when the price of oil hit $147 a barrel a deep recession kicked off very soon after. The price of oil promptly collapsed and as a result inflation only spiked rather than went into over-drive; also the recession, whilst deep, was shallow (clearly QE and other externalities played a role here).

As the global price of oil has ticked up again through 2010 and now 2011, it is no coincidence that the Western Economies have faltered for growth. Oil is a key driver in inflation but also for manufacturing and transport. High oil prices create demand destruction in our economies as there is as yet no real replacement for it at a competitive price.

Real GDP quarterly growthNow with Gaddafi going and the market outlook driving oil downwards under $100 it may really help the Western Economies for the next quarter to stave-off another recession (a European Sovereign Crisis denouement may bring one one, but that is for another post). 

 Cause and effect are always hard to identify at a macro level, but the sudden rise of oil in 2008 is exactly before the 2008 collapse, as is the rise back up to today's levels also starting to affect the UK GDP growth of 2010.


John Thomas said...

UC it has always amazed me with the price of petrol and diesel so high, how fast people are driving on the motorways, only yesterday I crossed the M1 near Barnsley and the number and speed of vechicles was amazing, the sound could be heard over a mile away. It seems that the price of at the pump is no deterrent, unlike the fiasco 10 or so years ago and the petrol/diesel strike. Sorry to remind you that traffic moves here abouts in the sticks that is until you approach towns and cities then it is nose to tail(especially at rush periods)

Nick Drew said...

yes I have just clocked out of silver: the world appears to think today is a 'good news' day

(for the time being)

however the gold long stays in place for a while yet ...

Budgie said...

John T - yes it's terrible, only the nomenklatura should be able to drive that fast on motorways. They are more important, after all. We would save fuel and the planet by making the peasants walk.

Old BE said...

The world economy could do with a bit of a breather!

John Thomas said...

Budgie, I wonder how people coped without cars if they are in business in modern times and travelling to work they can do secure internet conferencing, but how many are actually working as such on a Sunday, I used to, but not in a car, when I was using a car, I was using it much more for their business than mine & then I got 23p a mile now in the same job I would get nothing.

Anonymous said...

The falling price of oil would make gold mining more profitable. September rally anyone?

CityUnslicker said...

Make or Break September - disaster or recovery - it is very black and white.

Anonymous said...

According to the Americans, a $10 fall in the price of oil means the equivalent of a 4p drop per litre at the pumps.

Yes I did convert using US galls, not Imperial too!

Now all we need is for the greenies to see sense!