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Bloomberg

Surging crude prices are posing another headwind for the world economy after US President Donald Trump’s “zero” pledge on Iran oil sales.
Brent crude has risen about 40 per cent this year and is at the highest in six months. While higher prices due to strong demand typically reflects a robust world economy, a shock from constrained supply is a negative.
Much will depend on how sustained the spike proves to be. Exporting nations will enjoy a boost to corporate and government revenues, while consuming nations will bear the cost at the pump, potentially fanning inflation and hurting demand.
Ultimately, there comes a point where higher prices may be damaging to everyone.




1. What does it mean for global growth?
The impact will vary. Rising oil prices will hurt household income and spending and it could accelerate inflation. As the world’s biggest importer of oil, China is vulnerable, and many countries in Europe also rely on imported energy. Seasonal effects will also impact. With the Northern Hemisphere summer approaching, consumers can switch energy sources and scale back usage. A slowing world economy will also hurt demand and by extension keep a lid on prices.

2. How can the world economy absorb oil at $100?
For a sustained hit to growth, economists say oil would need to hold above US$100. It also depends on dollar strength or weakness, given crude is priced in greenbacks. Analysis by Oxford Economics found that Brent at US$100 per barrel by the end of 2019 means the level of global gross domestic product would be 0.6 per cent lower than currently projected by end-2020, with inflation on average 0.7 percentage points higher.
“We see increased risks of significantly higher oil prices,” Oxford economists John Payne and Gabriel Sterne wrote in a note. “In the short-run, it is likely the supply impact will be offset by higher production elsewhere, but the market is tightening and all it would take is one more shock to supply and oil could reach US$100.”

3. How will Iran and Trump impact the market?
An upending of global oil trade around the Iran-Trump spat could continue to have a sizeable impact on financial markets, as the affected supply is as much as 800,000 barrels a day. Uncertainties around availability have already whipsawed oil markets. And the political sensitivities of these developments have other markets bracing for volatility.
Trump has pledged to help, alongside Saudi Arabia and the UAE, those needing to shift orders from Iran to another supplier. But the US claims that its domestic supply can help offset the loss are a high bar to meet, given that the daily American output for similar crude is about a quarter of Iran’s.
4. Who wins from higher oil prices?
Emerging economies dominate the list of oil-producing nations which is why they’re affected more than developed ones. The increase in revenues will help to repair budgets and current account deficits, allowing governments to increase spending that will spur investment. Winners include Saudi Arabia, Russia, Norway, Nigeria and Ecuador according to analysis by Nomura.
5. Who loses?
Those emerging economies nursing current account and fiscal deficits run the risk of large capital outflows and weaker currencies, which in turn would spark inflation. That in turn will force governments and central banks to weigh up their options: hike interest rates even as growth slows or ride it out and risk capital flight. Nomura’s losers list includes Turkey, Ukraine and India.

6. What does it mean for the world’s biggest economy?
While US oil producers try to take advantage of any sales boost from customers moving away from Iran, the broader US economy will not necessarily see benefits with oil price tags as high as US$100 a barrel.
It would be a squeeze on American consumers that are the backbone of still-steady economic growth. Prices at the gas pump already have risen 6.3 per cent this month to US$2.87 a gallon, which could weigh on retail sales that jumped in March by the most since 2017.
And if things go awry in global oil markets, there’s risk that political blame shifts back to the US for the sanctions, which could mean backlash via investment or other channels that threatens economic stability.

7. Will it lead to higher inflation around the world?
Because energy features prominently in consumer price gauges, policymakers look to core indexes that remove volatile components. If the run-up in prices proves to be substantial, and sustained, those costs will filter through to transport and utilities.
8. What does it mean for central banks?
Led by the US Federal Reserve, central banks around the world have taken a dovish tilt as the absence of inflation allows policymakers to shift their focus to slowing growth. That’s unlikely to quickly change. The International Monetary Fund (IMF) this month lowered its global growth forecast and said the world is in a “delicate moment.”


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Commodities

What does US$100-per-barrel crude oil mean for the world’s economy? It depends how long the price holds and who you are

Traders on the floor of the New York Stock Exchange (NYSE) at the start of the trading day in New York on 20 January 2016. Photo: EPA

US crude exports to Asia barrel/year 80 (m) 70 60 50 40 30 20 1 10 China Korea Japan South sources: US EIA. s&p Global Platts 2014 Singapore 2015 India 2016 Malaysia 2017 Jan-Nov Thailand Taiwan SCMp

(180326) -- BEIJING, March 26, 2018 (Xinhua) -- The graphic shows that China launched trading of crude oil futures contracts on March 26, 2018. China launched trading of crude oil futures contracts at the Shanghai International Energy Exchange on Monday in its steady move of opening up the financial sector. It was the first futures contracts listed on China's mainland to overseas investors, putting domestic and foreign investors on an equal footing. (Xinhua/Lu Zhe/Shi Manke)

FILE PHOTO: An oil tanker unloads crude at a terminal in Zhoushan, Zhejiang province, China July 4, 2018. REUTERS/Stringer/File Photo ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT.

An employee demonstrates a oil drilling simulator in a training room at BP Plc's International Centre for Business & Technology (ICBT) in Sunbury on Thames, U.K., on Thursday, July 19, 2018. Bernard Looney, BP's upstream chief executive officer, suggests much of the recent cost reductions have to do with tech's increasing ability to let them do more for less. Photographer: Simon Dawson/Bloomberg

Asia’s slowing economies and oversupply weigh on oil markets

Global oversupply still dominates oil markets. Photo: Reuters

Brent, the benchmark for the oil market, to be changed by Platts

In this file photo, a supply ship at the Edvard Grieg oil field, in the North Sea. Photo: NTB scanpix via AP

RESTRICTED TO EDITORIAL USE - MANDATORY CREDIT " AFP PHOTO / SHELL - KEN TAYLOR - VIA ANP" - NO MARKETING NO ADVERTISING CAMPAIGNS - DISTRIBUTED AS A SERVICE TO CLIENTS A picture released by Shell shows the Gannet Alpha platform in the North Sea. Shell was battling an oil leak in a North Sea pipeline off the British coast on August 13, 2011 the Anglo-Dutch oil giant company said. The leak was discovered Wednesday after an oil sheen was spotted on the surface near the Gannet Alpha production platform, 112 miles (180 kilometres) east of Aberdeen, on the Scottish east coast. AFP PHOTO / SHELL VIA ANP

Bloomberg Best of the Year 2016: The West Phoenix oil platform, operated by Seadrill Norge AS, third left, stands with other unused platforms in the Port of Cromarty Firth in Cromarty, U.K., on Tuesday, Feb. 16, 2016. The pace of drilling in the North Sea, the center of U.K. oil production for the past 40 years, has sunk to a record as crashing energy prices force explorers to abandon costly projects. Photographer: Matthew Lloyd/Bloomberg

China wants to disrupt oil with an all-new market

China, the world's biggest energy consumer, overtook the US as the world's biggest crude importer in 2017.

Even though China is the top importer of crude oil, its consumption trails both the US and the EU.

Oil market looks neutral to bearish in near term as focus returns to fundamentals

Traffic moves on the arrival level of Los Angeles International Airport in Los Angeles, California in this file photo taken November 21, 2012. The Obama administration on Monday announced new fuel and automobile rules to cut soot, smog and toxic emissions, which it says will help reduce asthma and heart attacks. REUTERS/Jonathan Alcorn/Files (UNITED STATES - Tags: TRANSPORT POLITICS ENVIRONMENT HEALTH)

View of a Chevron refinery in Richmond, California. Market observers are keenly watching to see if US crude production ticks higher with crude prices having roughly doubled since February. Photo: AFP

OPEC adjusts to ‘new normal’ in oil markets

OPEC Secretary General Abdullah al-Badri speaks at a news conference in Vienna, Austria, as the organization adjusted to new realities in the oil market. Photo: Xinhua

Shell and Exxon squeezed out of bid for 30pc stake in Shenzhen LNG project serving world's third-largest oil market

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Brent crude has risen about 40 per cent this year and is at the highest in six months
Much will depend on how sustained the price spike is. Exporters will enjoy the boost while importers will bear the brunt of the cost at the pump


The economic impact of higher oil prices depends on the duration that the price holds. Exporters will enjoy the boost while importers will bear the brunt of the cost at the pump


Energy

Explainers: Business

Explainers