IMF Official: Global Economy Can Survive Short-Term Oil-Price Surge

Wednesday, 23 Feb 2011 12:00 AM

 

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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, said the International Monetary Fund’s No. 2 official, echoing Deutsche Bank AG and Bank of America Merrill Lynch.

Futures for April delivery climbed to within $2 of $100 a barrel in New York today, and London-traded Brent rose to $108.57, close to the highest since September 2008, as escalating violence in Libya stoked concern supplies from the region will be disrupted. Oil in New York has gained almost 6 percent since Jan. 24, the day before the first anti-government protests erupted in Egypt.

“It’s unlikely it would make a substantial change in the global economic outlook,” John Lipsky, the IMF’s first deputy managing director, told Bloomberg Television’s “Inside Track” today. The Washington-based lender assumed oil would average about $95 a barrel this year when it forecast global economic growth of 4.4 percent for 2011, he said.

Political unrest that has swept from Tunisia to Yemen, Algeria, Bahrain and Iran in the past four weeks is fanning oil’s advance at a time when the global economy is emerging from the deepest recession in more than 50 years. U.S. consumer confidence rose to its highest level in three years this month, according to a report today. Data showed yesterday that German business confidence increased to a record in February.

While an extended $10 advance in oil cuts 0.5 percentage point off U.S. growth over two years, the world’s biggest economy will expand 3.8 percent this year, almost a percentage point more than in 2010, according to Deutsche Bank.

‘Relatively Strong’

“Economies are vulnerable to the oil price, but so far it’s looking like business and consumer confidence are relatively strong,” said Michael Lewis, London-based head of commodities research at Deutsche Bank, which predicts world growth will surpass 4 percent for the second successive year.

At least 250 people died in the Libyan capital Tripoli overnight as protests against Muammar Qaddafi’s leadership spread, al-Jazeera reported. Libya accounted for 4.6 percent of the 29.4 million barrels of oil pumped daily by the Organization of Petroleum Exporting Countries in January, making it OPEC’s ninth-biggest producer, according to data compiled by Bloomberg.

Brent may trade between $105 and $110 a barrel in coming weeks if the unrest continues, and reach a record should the violence spread to larger Middle East producers, such as Saudi Arabia, Goldman Sachs Group Inc. said in a report today. Global expansion would be hurt if there were a sustained surge in oil to about $120 a barrel, according to Deutsche Bank and BofA Merrill Lynch.

Inflation Concern

The risk of costlier crude is that it may deprive consumers of purchasing power, hurt corporate profits and force central banks to raise borrowing costs to curb price increases. Inflation in China, the world’s biggest energy consumer and fastest growing major economy, was 4.9 percent in January, above the government’s target.

“The global recovery now faces a serious threat from a sustained oil-price spike,” said David Hufton, London-based managing director at PVM Oil Associates Ltd.

About $10 of the recent increase in the oil price relates to tension in the Middle East and Africa, with the remainder a reflection of the strengthening global economy, said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

“The old rule of thumb was that a $10 increase reduces global growth by half a percent, but if that still held then the world would now be in a deep recession,” said Jessop, a former U.K. Treasury official. “The point is oil prices are high, but the global economy is in a much better position to cope so it’s not too big a problem.”

Airlines Hedged

U.S. government data also show the world’s largest economy imported less than half of 1 percent of its oil imports from Libya in the past two years.

“The good thing is we’re seeing generally positive economic conditions and the higher oil prices we’re seeing don’t seem to be having an impact on the economic climate,” Willie Walsh, chief executive officer of International Consolidated Airlines Group SA, said in an interview today at an aircraft finance conference in Geneva sponsored by ICBI. “Most airlines are hedged.”

Deutsche Lufthansa AG’s hedging contracts for this year mean the airline is saving money when the price of crude oil rises to more than $88, Stefanie Stotz, a Frankfurt-based spokeswoman for the company, said today.

Energy Bill

The world recovery would be jeopardized if oil climbed to average $115 a barrel this year and $130 next year, according to analysts at BoA Merrill Lynch. That would return the world’s energy bill as a share of the economy to the 9 percent level of the 1980s, when costlier crude tipped consuming nations into a recession, they said in a Jan. 25 report.

Still, that’s unlikely because energy demand is set to ease by almost half this year to an average of 1.5 million barrels per day, inventory levels are near a five-year high, OPEC nations have more spare productive capacity than in 2008 and more Iraqi crude is on the way, according to the report.

Not all economies are safe, say the BofA Merrill Lynch strategists. Turkey, so-called peripheral European economies, India, South Korea and Indonesia could start to suffer if oil averaged $110 to $120 a barrel this year, while a range higher than that would start to pinch Germany, Japan and China.

“We’re hoping capacity will be brought to bear so it will continue to support our economic recovery,” Deputy U.S. Energy Secretary Daniel Poneman told Bloomberg Television.

Mohammad Ali Khatibi, Iran’s governor to OPEC, said the organization is supplying more oil than the world market needs, and it has no plans to call an emergency meeting.

“There are some temporary supply issues, but stocks are high and there is no permanent shortage in supply,” he said.

© Copyright 2014 Bloomberg News. All rights reserved.

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