What are the effects of an oil price rise?

16th February 2012

Today I wish to go behind the news, or at least the news in the mainstream media, and take a look at a powerful influence on the world economy which only gets more than a passing mention when it moves to extremes. It is the price of a barrel of crude oil. In my opinion it has been a much stronger influence on the credit crunch era than it has be attributed with. For example its surge from US $60 to above US $130 per barrel in terms of the Brent crude benchmark from the beginning of 2007 to the middle of 2008 not only exacerbated recessionary forces but also gave commodity price inflation a push upwards. We will never know how much weaker the credit crunch might have been without this but I have suspected for some time that a fair proportion of its problems were caused by the oil price surge.

Why raise it now?

Simple, the price of a barrel of Brent crude oil touched US $120 yesterday. It is not getting much attention but even allowing for a dip back to US $118.77 this morning it is up just under 14% on a year ago. Furthermore it has risen just under 11% in 2012 so far,so we can see that there has been something of a surge.

Actually this is not that different a pattern to 2011 and this is another area where there are possible elements of #carboncopy2012. As to the media and pundits I suspect many of them are quiet because they forecast that the price of oil would fall in 2012 and they do not want to draw attention to that. Perhaps it also reminds not to concentrate too much on the crisis in the Euro zone as there is economic growth in other parts of the world which may be helping to drive the oil price higher.

There are other influences on the oil price right now such as the sabre-rattling by Iran and the continuing political problems in various Arab states as the Arab Spring looks as though it will reach its second springtime. But as ever politics is not my sphere and they could as easily ebb away as escalate.

The effects from an oil price rise

Recessionary

The deflationary impact is more of a substitution one. If your finances are particularly tight but you need oil for example to heat your home then spending more on oil means that you have less to spend elsewhere. In the end all budgets are limited to some extent but many have some flexibility before this impact takes place. For some there is a direct recessionary effect and I reminded of this regularly by my brother who is a driving instructor and for whom the cost of petrol is a big influence/factor.

Is Wales an example?

Some support for this argument has come from more and more evidence emerging that higher oil prices have led to less motoring taking place and hence lower levels of petrol and diesel consumption. From the Oil Drum

"Car use was increasing year on year up to 2007 but has been falling ever since. In 2007 motorists drove 13.9bn miles on Welsh roads, by 2010 this had fallen to 13.3bn, according to figures from the Department for Transport."

This is not untypical as there are reports of this from around the UK. Indeed there are similar reports from the United States as Bloomberg reported a month ago (so before the recent rises).

"Fuel use fell below a year earlier for the 18th consecutive time last week, slipping 3 percent from 2010 levels. Fuel demand over the previous four weeks was 3.4 percent below a year earlier, the 41st consecutive decline in that measure."

This is not outright proof because we are in a weak economic spell for the two countries mentioned which is also a factor but it is a concern. As we have a wide geographical spread on here I would be interested in readers thoughts from their own countries.

Inflationary

Continue reading…

 

More from Mindful Money:

Should investors tap into oil?

The Commodities Bubble: Explained

Oil, Iran and the next global recession.

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