An intensification of US political pressure on Venezuela and Iran has given oil prices another leg up on Tuesday. The roughly 30% increase in Brent since December now ranks as the 11th largest price spike in the past seven decades. Disruptions in supply now look increasingly likely. The most recent US moves have been to ban the US purchase of any debt issued by the Venezuelan state, following what President Donald Trump described as a “sham” election. The administration also laid out tough demands before entering a new nuclear deal with Iran, making a re-imposition of sanctions increasingly probable. Even if OPEC seeks to offset supply disruptions, its efforts will eat into spare capacity and increase crude's upside risks. Our six-month Brent forecast is USD 80/bbl (currently USD 79.5).
But we see reasons to expect the impact on growth to be smaller than in the past:
- The world economy relies less on oil. In real terms, oil prices are still below where they were during most of 2005–15. USD 80/bbl Brent today is equivalent to USD 67/bbl in 2008 dollars. And global oil intensity (units of oil equivalent needed to produce one unit of real GDP) continues to decline: the world economy needs 7% less oil to produce the same amount of GDP as in 2007.
- The US has become less vulnerable to higher prices. The large increase in US shale production has broken the historical correlation between the economy and oil prices: the US is now a net beneficiary of higher oil prices, despite still being a small net oil importer. Given the size of the US economy, this country-specific effect mitigates the overall impact on global growth. By our calculations, a spike to USD 100/bbl would shave only about 16bps off global growth next year, with oil producers adding about 5bps to it while consumers subtracted 21bps.
- Overall, higher oil prices benefit emerging markets. While there are winners and losers, countries shipping out oil rely so much on these exports that a price rise will likely improve their macroeconomic fundamentals significantly, while those importing oil will be less affected.
Overall, we see the impact of higher oil prices as having a relatively limited impact on global DP. We remain overweight global equities.
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