Cost of oil poses problems for the economy again
Shawkat Hammoudeh
Issue date: 7/3/09 Section: Ed-Op
The oil price and its supply and demand fundamentals are coincident indicators. At certain times, particularly when the world economy is reaching a turning point, the oil price looks up to leading indicators such as the stock market and divorces itself from its fundamentals to seek the road ahead. The stock market and six others out of the United States' 10 leading indicators have signaled that the recovery is not too far from here. The Deutsche Bank estimates that the positive relationship between the S&P 500 index and the oil price is $7 per barrel for every 50 point-increase in the S&P 500 index. This relationship increases significantly when the speculators become active as they are these days. Thus, the oil price has put aside its current supply and demand fundamentals and started to rely on the leading indicators as precursors of future fundamentals. Speculators have detected this change and helped move the oil price further up.
As I predicted in my most recent post of the U.S. recovery, the U.S. economy is expected to go back to positive GDP growth in the fourth quarter of 2009. This recovery will first be tepid but will gain strength to yield an economic growth between 2.5 percent to 3 percent around 2012. A U.S. economic recovery and expansion should help breed and strengthen other recoveries around the globe. On the other hand, it is more likely China will start its recovery before the U.S. and reach 10 percent to 12 percent GDP growth circa 2012. India is now achieving more than 5 percent economic growth and should return to 8 percent or more by 2012.
Relating this global growth prospect to oil demand, it is likely that we will have a strong demand growth for oil that eventually amounts to more than 2.5 percent per year around 2012. If we measure the cumulative increase in demand by 2012, we should have a demand for oil that reaches more than 90 million barrels per day, up from its current level of about 83.3 barrels per day. When this sizable oil demand is compared to the available supply at that time, we should have a tight balance between supply and demand in which the marginal oil matters considerably. This would be a fertile environment for speculators to push the oil price much higher than what the 2012 fundamentals warrant. Again, we will have another unhappy divorce between the oil price and its fundamentals. Two hundred dollars per barrel should again appear in the radar screens of the speculators. Such a high oil price will have enormous political, economic, and cultural repercussions on the world and on the oil producers in particular. Many economic and political scenarios can be reassessed in terms of this highly probable oil price outcome.
Shawkat Hammoudeh is a professor of economics. He can be reached at op-ed@thetriangle.org.
As I predicted in my most recent post of the U.S. recovery, the U.S. economy is expected to go back to positive GDP growth in the fourth quarter of 2009. This recovery will first be tepid but will gain strength to yield an economic growth between 2.5 percent to 3 percent around 2012. A U.S. economic recovery and expansion should help breed and strengthen other recoveries around the globe. On the other hand, it is more likely China will start its recovery before the U.S. and reach 10 percent to 12 percent GDP growth circa 2012. India is now achieving more than 5 percent economic growth and should return to 8 percent or more by 2012.
Relating this global growth prospect to oil demand, it is likely that we will have a strong demand growth for oil that eventually amounts to more than 2.5 percent per year around 2012. If we measure the cumulative increase in demand by 2012, we should have a demand for oil that reaches more than 90 million barrels per day, up from its current level of about 83.3 barrels per day. When this sizable oil demand is compared to the available supply at that time, we should have a tight balance between supply and demand in which the marginal oil matters considerably. This would be a fertile environment for speculators to push the oil price much higher than what the 2012 fundamentals warrant. Again, we will have another unhappy divorce between the oil price and its fundamentals. Two hundred dollars per barrel should again appear in the radar screens of the speculators. Such a high oil price will have enormous political, economic, and cultural repercussions on the world and on the oil producers in particular. Many economic and political scenarios can be reassessed in terms of this highly probable oil price outcome.
Shawkat Hammoudeh is a professor of economics. He can be reached at op-ed@thetriangle.org.
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