The global economy can do surprisingly well with $129 in gross


Many players are already precautionaryly ending their oil purchases from Russia. Those who haven’t can now think twice, after Shell Plc’s purchase of a shipment of crude was criticized by Ukrainian Foreign Minister Dmytro Kuleba as smelling of ‘Ukrainian blood’ .

In a market where West Texas Intermediate crude averaged around $51 a barrel for six strong years from early 2015 to late 2020 and fell as low as minus $40 less than two years ago, trading current north of $130 appears to be the start of the Apocalypse. In truth, it’s almost a return to normal. Over the previous five years since the start of 2010, the price averaged $92, or about $119 at the start of this period, after adjusting for inflation using the Price Index for American consumption. War and sanctions the likes of which the world has rarely seen in decades are only pushing oil to levels that would have seemed routine a decade ago.

It was not a bad time for the global economy. 2010 and 2011, when crude prices recovered from the 2008 financial crisis to the pace they had maintained through mid-2014, were two of the strongest growth years since the mid-2000s Admittedly, this was aided by the fact that prices were driven higher by the strength of demand rather than a shortage of supply. Yet the link between high oil prices and global recessions in general is weaker than you might think.

On the one hand, the exorbitant expenditure of one country is the lavish profit of another country. Emerging economies tend to perform better than rich economies when oil prices rise, probably because for many of them a large share of exports and GDP has traditionally come from hydrocarbons. Stock market indices of all stocks in Saudi Arabia and Nigeria have both risen more than 10% so far this year, roughly the same amount as stock markets in wealthier countries like the United States and Japan fell.

Even if you limit your horizon to only the richest nations, the connection is surprisingly weak. It is intuitive, of course, that a rise in crude prices translates directly into a slowdown in economic activity, since energy for most of us is a non-discretionary item. If we spend more to fill our gas tank or pay our utility bills, we will have to save money in other parts of our household budget, such as buying clothes.

The problem with this theory is that oil is no longer such a large part of most people’s expenses. In the basket of goods from which the US consumer price index is constructed, it only represents 3.7%, falling to 5% for blue collar workers. That’s about the same as restaurant meals, furniture, or utility bills, and far less than medical care, auto sales, or food at home. Voters are undoubtedly seeing a sharp rise in prices at the pump. However, the economy is often spared.

Why have crude price spikes so often led to economic decline, then? One theory advanced in an influential 1997 paper co-authored by future US Federal Reserve Governor Ben Bernanke is that it’s not the price of crude itself, but how the central bank reacts to these price. A central bank with a fanatical inflation-fighting goal will take rising energy prices as a signal to raise interest rates, which will also squeeze the economy in general, including a much larger part of the expenditure basket: housing costs.

To mitigate the effects of an oil shock, officials simply have to sit back and wait for the crude market to rebalance. This is in practice what they do when they focus on core inflation to eliminate the effect of more volatile food and energy prices. Raising interest rates to eradicate high energy prices is like bleeding a patient to calm a fever.

Bernanke had the opportunity to put his ideas into practice a decade later, when crude prices hit an all-time high while he was in charge of the US central bank. Although a recession did indeed follow a few months after oil peaked in July 2008, few economists now claim there was a strong link between the two.

It’s a reason to worry less about the price of oil and more about all the other things going on in the global economy. Most recessions follow an oil price spike, but it is far less common for oil price spikes to lead to a recession. The global economy can still ride out this turmoil.

More from Bloomberg Opinion:

• Thirteen minutes that showed the uselessness of OPEC+: Julian Lee

• We already have a solution to the oil price shock: David Fickling

• The bond market experiences a recession following the oil shock: Lisa Abramowicz

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.


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