Upcoming Oil price shock
This economist warns of an oil price shock if Israel attacks Iran which is highly possible. My view is that if the crisis don’t escalate to a full-fledged protracted war, the oil price shock will be temporary and oil price will tumble further after the hostilities end, thus lowering inflation for the world.
“A sharply higher oil price effectively redistributes income from advanced economies and non-oil-exporting emerging economies to the oil exporters. Since most oil-exporting economies have limited ability to raise spending quickly, this will mean a damaging fall in global spending power. Consumers in the US account for close to 70% of GDP — they are very sensitive to high oil prices. A sharp rise in oil prices will snuff out the emerging — but fragile — US recovery. It will mean an even deeper and longer recession in Europe than we now expect. If the US and Europe weaken, Japan and China will also be severely hit and all this will ripple through to other emerging economies in Asia. The highly export-dependent economies of South Korea, Taiwan, Hong Kong, Singapore and Malaysia will take a severe hit. Will higher inflation add to Asia’s woes if oil prices surge? Certainly, in the near term, higher oil prices mean higher costs of energy and transportation and, so, elevated inflation. However, if global economic activity slows substantially — as is likely — then the inflationary spike will be reversed within a period of a few months as plunging demand reduces the pricing power of workers and retailers.
Asian countries with weakening external accounts will also be at risk. Higher oil prices would cause the current account deficits of countries such as India, Pakistan and Vietnam to deteriorate sharply. This could affect confidence in their currencies and cause sharp falls there. “
Entry filed under: Watch your step.