Follow Paul Donovan

Oil slides into the world economy

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

The USD 18 rise in the oil price means that more money is flowing from oil buyers to oil sellers. What does that mean for the world economy?

Oil buyers and oil sellers do different things with their money, and that changes the economic impact of the oil price rise.

Oil sellers have more money to spend. Oil sellers tend not to buy US goods and services (they buy from Europe and Asia). However, oil sellers have been spending more than they earned in recent years. The oil price rise may mean that oil sellers spend the same, but fund their spending from income rather than by selling assets.

Oil is priced in dollars. That means that if the oil price goes up, oil buyers need to buy more dollars with which to buy oil. That creates a new demand for the dollar.

If fully passed through, each 10% rise in the crude oil price would raise OECD headline consumer price inflation by 0.2% to 0.4%. Core inflation does not include crude oil, but it will still rise. Core inflation includes things like air fares that are oil related. Central banks should worry only if higher oil prices lead to higher wages.