THE SENSE of pessimism that hung over the world economy early this year has begun to lift in recent weeks. Trade flows are picking up in Asia, America’s retail sales have been strong, and even Europe’s beleaguered manufacturing industry has shown flickers of life. But it would not take much bad news to reinstate the gloom. One threat is that oil prices continue their upward march—on April 23rd the price of a barrel of Brent crude exceeded $74, the highest level for nearly six months. Though the dynamics of the oil market have changed over the past decade, dearer oil still acts as a drag on global growth.
The latest jump in oil prices has resulted from anticipation of a shock to supply, rather than surging demand (see article). On April 22nd America said that it would end waivers granted to a number of big economies, including China, India and Turkey, which allowed them to import Iranian oil, bypassing America’s sanctions regime. These waivers were put in place after President Donald Trump pulled out of a nuclear deal with Iran in 2018. Their expiry on May 2nd could reduce the global supply of oil by more than 1m barrels per day (about 1% of the total).
That is not the only threat to supply. War threatens production in Libya. Sanctions against Venezuela have taken supply off the market. Although a bottleneck in the Texan Permian basin will be relieved this year, it does not produce the heavy, sour crude found in Venezuela. And, after the American announcement, the head of Iran’s navy said that if it is prevented from using the Strait of Hormuz, through which one-fifth of the global oil supply flows, it could try to close the waterway for everyone else, too.
Oil inventories are low, and it is far from clear that other producers will increase output enough to compensate for the supply shock. In the long term Saudi Arabia and other OPEC members have an incentive to avoid sky-high prices, which would lead to a new wave of capital pouring into American shale production. But the last time the Saudis complied with a request from the White House to pump more—after Mr Trump scrapped the Iran deal—they were then stung by his granting of the waivers. In public they have pledged to keep the market in balance, but they also say there is no need for immediate action.
Working out what pricier oil means for the world economy is more complex than it used to be. In America gas-guzzling consumers will have to pay more to fill up their cars. But ever since the shale revolution, there has been an offsetting benefit to American GDP because higher prices stimulate investment in the Permian and other shale basins. Other producer countries are also more likely to spend any oil windfall than they used to be, supporting global demand. And more expensive oil should bring the benefit of lower carbon emissions (so long as it does not prompt the discovery of vast new oil fields).
Yet right now, pricier oil would be bad news for the global economy. It would hit its weaker spots. Europe, whose economy is in worse shape than America’s, has no shale industry to compensate for a hit to its consumers. China, which imports vast quantities of the black stuff, was the source of much of the recent global growth scare. And economic crises in Turkey, Argentina and Pakistan would be made worse by the higher inflation and larger current-account deficits that a rising oil price would bring.
Higher oil prices could also reduce central bankers’ leeway to see off any downturn. After oil prices rose in 2018, several central banks in emerging markets subsequently raised rates, fearing inflation. In America and Europe policymakers have this year been able to loosen the stance of monetary policy, providing economies with a much-needed boost to growth, because they can point to muted inflation expectations. Higher oil prices could start to put that trend into reverse. With many labour markets tight, central bankers are more likely to be spooked by oil-driven inflationary pressure.
A serious oil-price shock remains a possibility at this stage rather than a probability. But with the world economy still in a fragile state, it is an uncomfortable risk to run.