Clearly oil demand is also changing across the globe, especially for automotive use. Not only are more cars using more efficient diesel fuel, but there are continuing advances in hybrid car production and LNG and electric-powered vehicles.
Still, the world remains dependent on fossil fuels and the global economy is vulnerable to sharp increases in oil prices, especially at a time when other stresses are taking place such as debt problems in advanced nations such as Europe and the US. And there are always risks of geopolitical events that could serve to push oil prices higher even without normal demand influences.
Crude oil prices have surged 26% since the end of September rising above $100 a barrel. The rise reflects diminished fear of a US and global recession and heightened geopolitical risk in the Middle East. Despite the EU debt crisis, recent economic data suggests the US may avoid recession and China’s economy is heading for a soft landing. A report that Iran is closer to having a nuclear weapon and fear that Israel may soon strike Iran’s nuclear production facilities has raised tensions in the Middle East.
In the past, a sharp rise in crude oil prices came shortly before recessions in 1974, 1979 and 2008. The timing of the current crude oil price rise is troubling because it coincides with the risk that the EU debt crisis could drag the US and the global economy into recession. International Monetary Fund (IMF) models suggest that moderate oil price movements have limited impact on the global economy – for every $10 dollar rise in the price of crude there is a 0.25% drop in USGDP. According to the International Energy Agency (IEA), oil prices above $100 a barrel represent oil burden of 5% of gross domestic product for the global economy. The IMF models and IEA analysis suggest that higher oil prices dampen demand but are unlikely to derail growth unless there is a significant spike in prices.
Analysts at JP Morgan forecast crude oil prices to rise to $110 a barrel in 2012 and average $118 a barrel in 2013. The IEA, however, recently warned that oil prices could reach $150 per barrel if near-term oil production investment in the Middle East and North Africa (MENA) region falls. The $150 price target is based on the IEA forecast that global oil demand is expected to reach 99 million barrels a day over the next two decades from 82 million barrels today. This will require greater oil production from MENA. The global economy can adjust to $110 barrel oil but probably not easily to the IEA’s $150 scenario.
The rise in crude prices is not a zero-sum game for the global economy. Oil producers will benefit from the current rise in crude prices and receive a significant windfall. This windfall can be used to buy goods and services which is positive for the global economy. Europe is most vulnerable to the current rise in crude prices as the EU moves towards austerity. Higher oil prices will have a greater impact on that region. For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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