Saudi attack comes at ill-favoured moment for global economy
Monday’s sudden spike in the oil price could not have come at a more inopportune time for the global economy.
The manufacturing sector is in the doldrums around the world, the US-China trade conflict is unresolved and some major economies are on the verge of recession. A sustained increase in oil prices would be more bad news for global growth.
Economists say the attack on Saudi Arabia’s crude oil processing facility at Abqaiq could do significant damage to the global economy if the resulting rise in oil prices lasts more than a few months. A lot is riding on how long the disruption to Saudi oil production lasts — and the extent to which the gap can be filled by stepping up production or drawing down inventories elsewhere.
Some countries are more exposed than others, and the rising geopolitical tensions resulting from the attack will add to the uncertainties which are already weighing on business investment around the world.
Which countries are most exposed?
When a price spike is caused by a shock to supply, it effectively acts as a tax on consumers of oil, hitting GDP in countries that are net oil importers.
Holger Schmieding, an economist at Berenberg, noted that an increase of €10 per barrel generally adds 0.3 percentage points to eurozone consumer price inflation within two months, with a similar effect on consumers’ disposable income.
“For countries that are hovering on the brink of recession already, this could make the difference between stagnation or a mild contraction,” he said, pointing to Germany and Italy.
However even the oil-importing eurozone is better able to withstand higher prices than it was in the past. Both consumption and production have become less oil-intensive, with growth increasingly driven by services, and labour markets are in better shape.
The European Central Bank said last year — when oil prices stood at around $75 a barrel — that a stable price at that level would have little effect on real incomes or consumption.
The biggest losers would be large oil-importing emerging economies such as Turkey and Argentina — already in a highly fragile state, and ill-equipped to deal with even a temporary rise in inflation.
How would it affect the US?
The US position used to be clear-cut: any rise in gasoline prices rapidly hit GDP through its effect on consumers. For that reason, the US has kept an oil reserve since the 1970s to smooth out price spikes in global oil markets.
But since the shale boom, the price of oil has driven growth in the US through a different channel: the money companies invest in new plants and equipment.
When the price of oil collapsed in 2015, so did US business investment, largely due to a sharp fall in the number of rigs operating in Texas and North Dakota.
A 2018 analysis by the Kansas City Federal Reserve showed that enough of the US economy is linked to oil that high crude prices encourage even businesses outside the energy industry to buy new plants and gear.
Gasoline prices are still a big political concern for any US president, since consumers dominate in many swing states. But a rise in oil prices is no longer necessarily bad for the overall health of the US economy.
What would it mean for global growth?
It would be bad news.
The damage suffered by oil-importing economies after a price spike is usually offset by the boost to oil producers — but only partly, since they tend to save part of the gains.
And while the US economy is less exposed to oil price swings than in the past, a downturn in China — a net oil importer and big loser from price rises — now has a big impact on the economies of trading partners and so on global growth.
Jennifer McKeown from the consultancy Capital Economics also cautioned that if prices were driven higher by an escalation in Middle Eastern tensions, “benefits for some oil producers would have to be set against the severe costs of conflict for others”.
Even without a big regional flare-up, the heightened risks of conflict would “add to a host of reasons to feel uncertain about the global outlook” that are already weighing on business confidence and holding back investment across advanced economies, she said.
Will this affect central banks’ policy?
No. If the rise in oil prices persists, it will undoubtedly push up inflation. But monetary policymakers in developed economies would usually view this as temporary, and would be unlikely to change their stance as a result.
For the US Federal Reserve and European Central Bank — both battling to bring stubbornly low inflation up to target — higher energy prices might even have some welcome effects, if they led households and businesses to expect higher inflation in future and act accordingly.
For central banks in some emerging economies — notably Turkey, where investors already doubt policymakers’ resolve to bring inflation under control — the challenge would be bigger, however.