The world is diverting a greater proportion of its wealth to crude oil purchases than ever before, new research has found.
Oil soaks up 6.8% of GDP
The world is diverting a greater proportion of its wealth to crude oil purchases than ever before, new research has found, even as slower demand growth in some countries may temper record prices. Some 6.8 per cent of the world's gross domestic product (GDP) is spent on purchasing crude oil, higher than the 6.6 per cent spent in 1980 during the last oil crisis, a report by Lehman Brothers found. "Measured purely in monetary terms, oil is by far and away the most important primary commodity in today's global economy," the report said.
Economists agree record high prices could derail worldwide economic growth by affecting everything from transport and shipping costs to prices for petroleum-based products, but differ over what they think the size of those impacts will be. In addition to stating the seriousness of the situation, the Lehman report pointed to some bright spots in the world economy that indicate it may yet slog through the high prices and continue to grow.
"Given that the impact on both current account deficits and inflationary pressures have been less damaging, so far, than in the 1980s' cycle, we think stocks have been derated too far," the report said. Lehman said that the balance between exports and imports in Europe, called the "current account" by economists, remained positive, indicating oil-producing countries were "recycling" the money they receive from European countries by importing more goods from the continent.
It also noted that while high oil prices caused the US current account to fall from a surplus to a 2.4 per cent deficit in the early 1980s, high oil prices have not had the same effect this time around. The US trade deficit has steadily narrowed this year on the back of a weaker dollar, which makes products cheaper and more attractive for overseas buyers. The report also noted higher costs for fuel costs that have, for the most part, not been passed on to consumers.
"At least so far, the second round effects of higher oil prices have not been passed onto core inflation," the report said, "nor do they seem to have fed through into rising unit labour costs." Other analyses are more sceptical, however, and point to free-falling consumer confidence indices in both Britain and the US. Earlier this year, the UN cut its forecast for world economic growth this year to 1.8 per cent, partly on the basis of soaring food and energy prices.
Fuel prices have hit airlines and carmakers particularly hard, with Sir Richard Branson, the founder of Virgin Airways, predicting the financial demise of at least one major US airline this year. The Lehman report also gave hope to consumers that oil prices may fall slightly due to reduced demand. Ed Morse, Lehman Brothers' chief economist, predicted that crude prices will average US$130 (Dh477.5) in the third quarter of the year and $93 next year because of lower demand in industrialised countries.
The company believes, however, that oil demand worldwide will grow 1.2 per cent next year. According to the BP Statistical Review, oil consumption grew 1.1 per cent last year. Lehman's estimate for oil demand is in line with that of the International Energy Agency (IEA), which represents 27 major oil consuming nations around the world. In its latest report, the IEA predicts demand for oil products will grow by 1.2 per cent by this time next year.
Although high oil prices led to rapid reductions in oil demand in previous price rises, the report predicted that a continued growth of demand in China and other developing countries would outweigh a fall in demand for oil in the West. Several academic studies have demonstrated that growth in demand for oil in developing countries is highly inflexible and more a function of economic growth than oil prices.
Oil prices rose to a high of $145.83 yesterday in trading on the New York Mercantile Exchange. @Email:firstname.lastname@example.org