Rising Oil Prices Loom Over World Economic Recovery

The global economy faces a new threat from an old enemy: oil. A spike in the price of crude foreshadowed economic slumps in each of the last four decades. So economists are worrying because the price of Brent crude, considered the benchmark for the industry, recently reached its highest point in nine months—above $115 a barrel. The jump in price came amid fresh violence in Iraq, the Organization of the Petroleum Exporting Countries’ second-biggest producer after Saudi Arabia. Brent started the year about $6 cheaper.

The rule of thumb favored by many economists is that every $10 increase in the price of a barrel of oil ends up reducing global growth by about two-tenths of a percentage point. That’s not an inconsequential amount for an already lackluster expansion. The World Bank on June 10 cut its outlook for 2014 global growth to 2.8 percent from 3.2 percent in January. “There is no doubt that, beyond a certain point, higher prices become a major constraint on global economic activity, particularly if the price reflects supply problems, rather than buoyant demand,” says Julian Jessop, chief global economist at Capital Economics in London. Energy importers such as China and Japan would suffer the most from any jump in price, though exporters in the Middle East would benefit, according to Neil MacKinnon, a global macro strategist at VTB Capital in London. Oil now has the probability of all-out civil war in Iraq baked into its price, as well as the prospect of more violence in Ukraine. Those two risks add $10 to $15 to the price of a barrel of crude.