Oil prices: recession is not inevitable

25th March 2011

Chief economist Keith Wade says that while prices have risen by 60 per cent since July 2010, this pales in comparison with the 2007/2008 increase which saw prices rise 92 per cent and hit $150 a barrel.

Currently the price of oil is hovering around $115 but the fund manager believes that only around £20 to £25 can be attributed to the crisis in the Middle East and North Africa.

Shocks from the 1970s and 1990s saw the price of oil treble and double respectively.

Wade adds: "More importantly, this shock is not purely about supply problems, but strong demand from Asia and the US has also played a role. Demand shocks tend to have less overall effect on the world economy than supply shocks."

4 thoughts on “Oil prices: recession is not inevitable”

  1. Anonymous says:

    I notice from the BIS review that the 10 larges prime USt Money Market Mutual Funds cut back their European bank holdings by $79bn between end of May and end of July. Is this and safe haven flows having any influence?

    1. Simon Ward says:

      A change in the composition of money market funds’ assets wouldn’t affect the broad money measure discussed here. The latest figures quoted refer to the second quarter, before recent financial turbulence, so shouldn’t be significantly distorted by safe haven flows.

  2. Anonymous says:

    Does this mean a pick up has potential, but though the cash liquidity is there it doesn’t mean that it will necessarily be used?    Is it likely business would sit on cash?

    1. Simon Ward says:

      You’re right – low confidence may delay spending of the cash. However, a recession usually requires business to cut investment and jobs and this is much less likely when liquidity levels are strong.

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