As the Egypt’s contagion continues to spread across nations in the Middle East, it raises fears of a spike in already volatile international oil prices?
Crude prices continue to surge owing to the growing unrest in the Middle East and North Africa and also limited gains in US crude inventories. Crude oil prices just crossed $108 a barrel, highest ever in last two-and-a-half years as worries grow that the distressed public in Libya may cut off some of the worlds oil supplies, ranked as OPEC's 10th largest crude exporter with 44 billion barrels of proven reserves account more than 3% of the global total oil reserves. The risk of higher oil prices sent stock markets from Tokyo to Paris to New York plummeting while Asian stocks were facing sharp losses. Stock Markets have relatively tranquil despite chaos in Egypt and Tunisia, but growing concerns in Libya is more frightening to investors because it is a major oil producer. Now investors concern that the turmoil in Libya could spread further across the Middle East which contains 57% of the world's total oil reserves and 30% of global oil production.
Global Recovery Trauma
Amidst growing signs of global economic recovery, but rising oil prices is posing a big threat to that recovery. The old rule of thumb was that a $10 increase of crude oil prices reduces global growth by half a per cent. As higher oil prices impact adversely on the cost to produce food and other goods and act as a drag on consumption of all from domestic devices to entertainment. Rising oil prices is mainly worrying given the feebleness of the global economy. During the conditions of increased global risk, the dollar generally goes up since oil priced in US dollars. However, temporarily stronger dollar will not enough to keep oil prices down and moreover it will cause stress on the US economy. Analyst believes that the US economy and the dollar might be poorly positioned to weather an oil price shock at this juncture.
Against a turbulent background, gold and silver prices are sky rocketing as investors turned to safe assets in the face of mounting unrest across North Africa (third-biggest oil supplier) and the Middle East. Gold prices climbed above $1,400 an ounce for the first time in nearly seven weeks as demand for the precious metal flourished as a haven from risk. Similarly, US gold futures for April delivery rose $18.90 an ounce to $1,407.50.
Outlook
Going by the bearish US and EU economic outlook reports and high inflation in China driven by food and energy, rising oil prices will certainly weigh on the global markets. International Monetary Fund (IMF) is of the view that the world economy can withstand the surge in oil prices sparked by unrest in the Middle East and North Africa so long as the increase proves short-lived. There is no doubt that economies are vulnerable to the rising oil price, but business and consumer confidence are relatively strong which will attribute the world growth will surpass 4% for the second successive year. However, if oil-price spike continued will certainly faces a serious threat to the global recovery. BofA Merrill Lynch strategists suggest that not all economies are safe. Peripheral economies in EU, India, South Korea and Indonesia could start to suffer if oil averaged $110 to $120 a barrel, while a range higher than that would start to pinch Germany, Japan and China.
Jany, Chief Economist
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