Oil prices are far from levels that threaten global growth

Oil prices are far from levels that threaten global growth

Oil prices are far from levels that threaten global growth
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Brent crude moved back above $110 per barrel last week, which prompted questions about whether current oil prices pose a threat to the global economy. The short answer is no.

We tend to advise clients to think about oil prices as having three key levels. There is a price that kills supply, which can be thought of as a level near cash operating costs. In today’s environment, we estimate this level to be $35 to $40 per barrel.

A second key price is the one we estimate to be targeted by key nations of the Organization of the Petroleum Exporting Countries related to their budget needs. We typically rely on our analysis of figures for Saudi Arabia. While our conclusions about this have been somewhat controversial compared with assessments of our industry peers, we have generally landed correctly on the topic over time.

We see the third key oil price as the one that kills demand. While there are several ways to skin the proverbial cat, the issue of a price that is “too high” can be addressed by an oil burden analysis. We do this by examining global spending on oil as a percentage of gross domestic product.

There are two key percentage triggers we arrive at through this analysis. The first is when spending levels average around 5 percent. The oil price needed to hit this figure is a Brent crude price of $130 per barrel for a full year. This 5 percent figure doesn’t kill demand, but is akin to tapping the brakes.

The other percentage trigger in this analysis is spending at around 7 percent. At this level, oil will negatively impact global economic activity. The Brent oil price needed to hit this 7 percent mark is $181 per barrel for a full year.

We are not suggesting our analysis here is the end-all-be-all, but about four decades of following the global energy markets suggest it does the best job of addressing the question of when oil prices are “too high.”

In a previously published study, we looked at the oil balance effects accounting for likely losses of Russian supply from embargoes, and the prospects for slower than previously forecast global oil demand growth this year due to various macro-economic considerations. The change in inventories we forecast and the resulting oil price at the end of this year would lead to a crude price that is certainly higher than recent levels but not so high as to warrant concerns about harming global economic health.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view