The price of oil has become ― once again ― a global problem. Even if it does not increase from current levels, chances are it can bring about a double-dip global recession, adding to the uncertainties surrounding the evolution of the advanced economies in the coming months. The eurozone, which is a net importer of oil, would be hit particularly hard.
During the second quarter of 2012, the price of oil has increased by approximately 15 percent compared to the first quarter, reaching a level dangerously close to that of 2008. Right now, at a time when both the advanced and the emerging economies are seeing their growth rates on the decline, it is not demand that is driving higher oil prices. Rather, the hikes have to do with geopolitics. The epicenter is Iran, with a tighter Euro-American, and the increasing possibility of an Israeli surgical attack on its nuclear sites. While Iranian exports account for only 3 percent of the world’s total, there is little slack capacity elsewhere to make up for the shortfall.
In contrast with the oil crises of the 1970s, the threat from higher prices is not greater inflation but slower growth. Other commodity prices are showing signs of moderation, and continued soft monetary policies around the world represent another signal that oil is unlikely to generate price instability. It is, however, contributing to the current account and financial imbalances in the world, with massive amounts of foreign exchange reserves being accumulated by the oil exporters.
The counterpart to that wealth accumulation is the reduction of the real income of oil importers, precisely those economies that right now are in great need of an increase in domestic demand in order to accelerate growth. In the United States, for instance, a 10 percent increase in the price of oil reduces GDP growth by between a quarter and half a percentage point, something that makes it harder for other parts of the world to recover as well. The effect is much larger in Europe. In the U.S. the outcome of the presidential election could well be decided by the price of oil.
The stakes are thus very high. Low levels of strategic oil reserves in the advanced economies coupled with little slack capacity among oil producing countries pose a severe risk to the global economic recovery. This in turn, could make financial deleveraging and restructuring harder. Europe needs to think carefully about what to do if the price of oil were to skyrocket. The International Energy Agency estimates that the European Union will pay some $502 billion for oil imports this year, compared to $475 billion last year. East Asian economies such as South Korea and Japan will also be hit by higher prices.
The impact of geopolitical tensions on oil prices is not a new phenomenon. Oil-dependency is a recurring problem afflicting oil importing countries in ways that create volatility and uncertainty for countries around the world. In oil exporting countries, price hikes are often associated with increases in corruption, with the average citizen rarely benefiting from the boom. At current and likely future prices, more oil deposits in less-accessible locations can add to global supplies. But the growth of the emerging economies and the likely recurrence of geopolitical turmoil make technological innovation and the development of renewable energy sources a top global priority.
Mauro F. Guillen is Director of the Lauder Institute at the Wharton School. Emilio Ontiveros is President of AFI and a Professor at Universidad Autonoma de Madrid.