Oil is a step from $100, how does this impact the Global Economy?

The imbalance between supply and demand in the crude oil market and the continuing tensions between Russia and Ukraine have led to rising oil prices. Crude oil prices have soared from around $70 in late 2021 to over $90 today. The Brent crude oil spot price recently hit $100.80 per barrel, and the price of crude oil futures in New York is currently just one step away from $100. If the war between Russia and Ukraine eventually starts, there are forecasts that crude oil may soar to $150 per barrel. If crude oil prices keep rising, it will undoubtedly worsen the economic situation in the US and other global economies already struggling with persistently high inflation. It will inevitably trigger a new wave of heavy losses within the global economy.

Oil prices soar to an almost 7-year high

Since last year’s end, global oil price trends have risen by about 20%, recently hitting a seven-year high. The last time oil prices rose to $100 was in 2014. If inflation persists or geopolitical tensions remain high, it is just a matter of time before the $100 level is breached.

(New York crude oil futures price chart)

The two major crude oil price indices recently hit their highest levels since September 2014, rising for eight consecutive weeks, setting a record for the longest weekly rally starting October 2021. The situation has forced the US government to take drastic measures to put the “emergency brake” on oil prices, seek political ways to curb the continued surge in crude oil and avoid exacerbating the high domestic inflation.

On the one hand, the United States and Iran are trying to restart negotiations on a nuclear deal between Tehran and the major world powers, which may increase Iran’s oil exports. If Iran’s oil production capacity returns, it will be good news for oil prices due to the increased supply. On the other hand, the influence of geopolitical factors on oil prices and the major oil-producing countries are inseparable. The political turmoil in the world’s major oil-producing countries has exacerbated the shortage of crude oil due to limited supply.

Russia is one of the leading suppliers of crude oil globally. However, as the relationship between Russia and Ukraine keeps deteriorating, and war seems inevitable, the threat of higher crude oil prices looms over the world. Russia has assembled about 130,000 troops on its border with Ukraine. Although the Russian government said last week that some troops are returning to their home base after military exercises near Ukraine, many diplomats remain unconvinced that Russia is pulling back. Still, the news eased the tensions between Moscow and the West to a certain extent. However, it is unclear how the relationship between the two countries will develop in the future. Until the world is convinced that Russia will not find an excuse to start a war with Ukraine, the impact of the Russia-Ukraine tensions will continue to affect oil prices. Moreover, the temporary easing of tensions on the border caused a short-term cooling of oil prices. Furthermore, the diminishing impact of the omicron variant on crude oil demand and other downward factors on oil prices also exist.

For now, the global demand for crude oil is still strong, and this trend is expected to continue over the medium term. The weekly US inventory data is expected to show that US crude oil inventories fell by 1.6 million barrels last week, and the current inventory is at an over three-year low, highlighting the imbalance between supply and demand. The high oil prices and demand have made more shale oil companies start investing, with data showing that US oil companies are increasing spending at a double-digit rate to increase shale oil production.

What happens to the world economy if oil prices rises above $100?

Bloomberg Economics forecasted that if crude oil prices climbed to $100 by the end of February, it would lift inflation in the U.S. and Europe by about half a percentage point in the second half of the year. On the other hand, JPMorgan Chase predicts that if oil prices rise to $150 a barrel, the global economic expansion will stall, and inflation will soar above 7%.

While a sharp increase in oil prices could boost economic income for oil-producing countries, the economies of most parts of the world will suffer to varying degrees. Businesses and consumers worldwide begin to bear rising costs for transportation, gas, food, and more. The blow will significantly slow down the recovery process of the global economy.

And, with no indication that inflation will ease significantly this year, the only way for the Fed to control it right now is to raise interest rates multiple times and shrink its balance sheet. Once oil crosses the psychological $100 mark, not only will it fuel inflation, it will pose a significant problem for governments globally. Although the Biden administration teamed up with other leading energy-consuming countries to release energy reserves to restrain oil prices last year, the symbolic effect was more significant than the actual effect. Also, high inflation has a knock-on effect on the job market. Workers need higher wages to cope with soaring energy bills, creating a vicious cycle fueling inflationary pressures. In the end, it will leave the Fed with no choice but to raise interest rates faster.

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