Oil Supply-Side Shock Would Hurt: Economist
CNBC EMEA Head of News
As oil prices have raced higher in recent weeks on the back of the crisis in the Middle East and North Africa, economists have begun to worry about the impact of a supply-side shock on the global economy.
There is rarely a happy ending when the price of crude jumps sharply, Stephen King, the chief economist at HSBC in London, said.
"In 2008, oil prices approached $150 per barrel. Shortly afterwards, the global economy collapsed," King said.
"There were, of course, other problems at the time – an imploding US housing market, the beginnings of a securitization crisis, the collapse of Lehman Brothers – but events three years ago nevertheless offer plenty of evidence that substantial changes in oil prices are big news for the global economy," he added.
"Indeed, for those who believe the global economy is ultimately fuelled by oil and gas, events in 2008 simply confirmed a pattern seemingly in place since the 1970s. Regular as clockwork, increases in oil prices of more than 100 percent lead to declining GDP," King explained.
There has not been a 100 percent jump in prices yet but "there are enough warning signs around for investors to feel a touch edgy," he added.
Exceptions to the Rule
The 2008 jump in oil prices was clearly not the only factor taking the economy into the recession, given the financial crisis blew up a few months later. There where, in King’s view, other examples in which other factors where at play.
One of them is the 1991 recession, "which was probably more affected by the credit crunch than by the temporary spike in oil prices following Iraq’s invasion of Kuwait," another is "the 1987 experience, when real oil prices did indeed double but there was no recession," he said.
"That doubling came from a very low level and, although recession was avoided, a stock market crash wasn’t. For those who were around at the time, memories of October 1987 are enough to make the blood run cold. There was no recession in 1987 but there was a stock market crash," King said.
Demand and Supply
The biggest problem is working out why oil prices are so high, according to King.
"Late last year, oil prices seemed to be rising for two main reasons. First, the Federal Reserve and other central banks in the developed world were pursuing unconventional policies - widely seen as an abuse of the printing press - in an attempt to kick-start economic activity," he said.
"As a hedge against all this 'monetary madness,' dollars were converted into 'real' stores of value, leading to significantly higher commodity prices," according to King.
"Second, because the effects of quantitative easing were felt more acutely in the debt-lite emerging world than in the debt-heavy developed world, global growth became more oil-intensive: oil consumption as a share of GDP is much higher in the emerging world than in the developed world."
We have now switched from a demand story to a supply shock story on the back of the crisis in the Middle East, King said.
"While Tunisia and Egypt hold little relevance for the global oil market, Libya is a different kettle of fish," he said. "It is by no means the biggest oil producer in the world – that accolade belongs to the Russian Federation and to Saudi Arabia –but it still accounts for around 2 percent of total output."
Saudi Arabia told CNBC last week that it would match any loss of production by Libya but King says the Saudis can only do so much.
"The risk is obvious: should the uprisings spread to other Middle Eastern oil producers, leading to further disruption to oil supplies, it’s difficult to see how Saudi Arabia could provide any offset," he said.