HY Markets Analysts:
Fears of supply disruption continue to violently move oil prices on uncertainty. This year already, WTI crude oil prices have a range in excess of $12 per barrel; great for speculative investors who trade on volatility, but not so great for importers of the rich commodity.
Perhaps the most alarming fact is that the volatility experienced so far is on the threat of severe supply disruption; meaning that if the worst case scenario is realised and severe supply disruption does take place, then there is no telling how high crude oil prices could rise.
Tensions in Iran, and supply disruption in Syria, Yemen and South Sudan have been the main culprits of volatile prices this year. For those worried about increasing oil prices, there was some relief this week as crude oil prices dropped $5 per barrel on discussion of a possible release of strategic oil reserves by consumer nations. At least for the mean time, this should limit panic stocking of oil reserves by those importing countries heavily reliant upon Iranian oil.
There is a generally accepted view that high crude oil prices hinder economic growth (governments like to frequently remind us of this theory to excuse their stuttering economic growth!). Since there are so many variables affecting economic performance, it is very hard to quantify the precise impact of higher oil prices on GDP. In August last year two International Monetary Fund (IMF) economists published a paper which challenged the general view that ‘higher oil prices are disasterous for economic growth in oil importing countries’, and instead proposed that the real impact of higher oil prices wasn’t that severe. They proposed that a 25 percent increase in oil prices; “will cause a loss of real GDP in oil-importing countries of less than half one percent, spread over 2-3 years”. At publication, in August 2011, WTI crude oil prices were around $90 per barrel, and WTI crude oil prices have already appraoched $110 per barrel this year. If severe supply disruption does take place, then governemnts, and economists, will be closely monitoring changes to their GDP.
Figure 1: WTI Crude Oil Price
