Initially when oil prices started to creep up, pundits painted pictures of a long recession. As the major global economies were then just struggling to get out of the recession, many thought high crude prices could be the last things one would have wanted in the circumstances.
However, the higher crude prices have not really dented the global economic growth. Despite the fact that the crude is still playing a very important role in the ongoing growth of the global economy, it is also well documented that crude in the intervening period has also lost some of its influence on the global economic development. The London Economist points out that in the eighties, when the world was struck with the “second oil shock” crude was contributing eight percent to the global GDP. Today the number has gone down to almost one-fourth — to two percent — of the global GDP.
In real terms, adjusted for inflation, even the current high oil prices are well below the 1980’s peak of $80 a barrel. The average US prices this year of $38 are approaching those of 1974, when crude averaged inflation adjusted $43 a barrel during the oil embargo. Indeed in the meantime, the global GDP has grown significantly, resulting in reducing its influence on the global economy, in real sense.
Perhaps for these reasons even the OPEC feels that they see little impact of the surging crude prices on the global economic growth. In its monthly report released last week it said the world economy seemed to be coping (with the oil prices) just fine. “The direct contribution of the concern-driven rise in oil prices to the economic slowdown in 2004 has been very small.”
“Going forward much will depend on how long the price of the OPEC reference basket remains above $35,” the report added.
Others also seemed to be concurring with the conclusion. The United Nations feels that soaring oil prices could shave as much as one percentage point from Asia’s gross domestic product (GDP) growth this year, forcing the region to make painful adjustments.
While the UN’s Economic and Social Commission for Asia and the Pacific (UNESCAP) had previously estimated Asia’s GDP would grow at a relatively high rate of 6.2 percent this year, the oil crisis could reduce this to 5.2 percent. Looking at the region as a whole, oil prices of “around $40 (a barrel) will mean a 0.5 percent reduction of growth,” Kim Hak-su, UNESCAP’s executive secretary said in an interview.
“If it hits 50 dollars, maybe we can estimate (a reduction of) around one percentage point of economic growth,” Kim said.
The region, however, was better equipped to survive this crisis compared to the oil shocks in the early and late 1970s with oil-consuming countries having enough foreign exchange reserves to serve as a buffer, he said.
Higher oil prices would likely cause inflation in major oil-consuming countries, but may not lead to stagnant economic activity.
“I’m optimistic that the oil price increase this time will not cause stagflation as such,” said Kim. Stagflation occurs in an economy when inflation rises at the same time as growth falls.
The “American economy is robust. ... The Japanese economy is recovering. The EU is stagnating but this year it will grow 1.8 percent and Asia as a whole ... will make around five percent plus,” Kim said.
Crude does not appear to be significantly derailing the global economic growth, as it did in past. Indeed some responsibilities off the OPEC shoulders in some senses.