Telegraph reported that concerns are now mounting over oil, as the price of a barrel of Brent crude, London's benchmark oil has moved back into the USD 120 range over recent months. Although it's far shy of the USD 147 record set in 2008 it's still high enough to raise eyebrows.
Credit Suisse analysts in a new study said that as the price of Brent oil has increased, for good reason the price of oil has challenged Greece as the tail risk de jour in financial markets.
The general view is that the oil price is being driven by the supply story at the moment, particularly the interruptions to Iran's output as it tussles with the West over its nuclear program.
The Credit Suisse team thinks that while Iran is playing a part, it is less of a price driver than thought, arguing that the rise in the oil price is more about the market's tight fundamentals.
On the demand side, emerging markets are proving resilient and the West's developed economies seem to be bottoming out. Meanwhile, the last two years have seen companies run down what were large inventories of oil, while growth in supply has not made a strong start to 2012, despite Libya starting to export oil again following the turmoil seen there last year.
The Credit Suisse team said that where many expected the return of Libya's exports to offer some relief to oil markets in 2012, instead its effect was almost entirely wiped out by the shutting of production in South and North Sudan, the delayed return of shut in Yemeni exports and the deepening crisis in Syria.
Put simply, there is not much oil readily available to the market to provide a buffer to a shock to supply. The fear is that oil prices would surge if there were another supply disruption or supplies from Iran plummeted in the grip of tightening sanctions.
If so, what would happen? A high oil price tends to slow growth as it makes the cost of doing business and daily life higher for both companies and the consumer you can think of it as an extra tax levied on their activities. In the US, every 1 cent rise at the gasoline pump is thought to add slightly more than USD 1 billion to US households' collective gasoline bill, assuming they don't cut back on their driving. The inflationary effect can be so strong that a high oil price in the long term can prove deflationary such is its negative impact on an economy's growth.
Of course, some countries and companies benefit from rising commodity prices as they enjoy higher revenues. In a normal situation, a higher oil price looks like a zero sum game overall, the ultimate impact would normally be more one of distribution rather than being negative or positive at a global level. However, if an oil price spike hit now as the world continues to recover from the global recession the losers may outweigh the winners.
The problem is that the countries that would benefit have generally already rebounded strongly. These are the emerging economy powerhouses such as Saudi Arabia, Brazil and the like although Canada and Australia are the Western exceptions to the rule. They have little scope for output to expand and many are already using policy tools such as higher interest rates to try to keep growth on a safe and sustainable pace. Meanwhile, the oil price rise would hit consumers hard in those economies in a fragile state, such as Japan and the US.
The team at Credit Suisse said that in simple terms, the current imbalance between growth in the emerging and developed economies has increased the impact of higher commodity prices on global growth. The positive effect has been limited by policy, while the negative effect has been exacerbated in the developed world by the lack of traditional policy firepower.
( Source: steelguru.com)