Macquarie Research, US Economics : How to cope with an oil supply shock

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US Economics Comment
How to cope with an oil supply shock
Event
 A potential supply shock to oil prices would be a headwind, though likely not a
disastrous one, for our bullish US growth outlook.

Impact
 With geopolitical concerns in the Middle East and North Africa starting to drive oil
supply disruptions, Macquarie’s oil economist, Jan Stuart, now expects material
upside to oil prices in the next six months is an increasingly probable risk.
 While a price spike would certainly be a challenge for the US economy, not all oil
shocks are equal. In particular, the strong economic backdrop that preceded the
spike and very expansionary macroeconomic policy suggest the ‘high’ oil price
scenario, of US$120/barrel this year, would be manageable. We expect GDP
growth would sustain an above trend pace, as with the pre-Iraqi war price spike in
2003.
 Stronger consumer balance sheets than for the 2008 oil price shock, a terms-oftrade
offset from firm agricultural commodity prices and US leverage to cheap
natural gas should be important factors.
Analysis
 Political unrest in the Middle East and North Africa is starting to drive oil prices
appreciably higher, with US$ crude prices near two and a half year highs this
week.
 Macquarie’s oil research team expect that supply disruptions in Libya and Algeria
are unlikely to be sustained, with oil exports representing a significant source of
foreign exchange for these economies. The release of emergency inventories
from the International Energy Agency is also expected to temper supply worries in
the near-term. As a result, their base case forecast is for demand drivers to propel
the oil price incrementally higher through 2011-2013, with WTI expected to
average U$95/barrel in 2011, and US$113.50/barrel in 2012.
 These are the assumptions we have used in our US economic forecasts, with US
GDP growth of 3.9% estimated in 2011, and 3.3% in 2012. Indeed, we expect a
secular trend toward demand-driven, higher global oil prices should be
manageable for the US.
 However, the team indicates that the Brent curve is pointing to potential material
upside to oil prices through mid-2011. Their ‘high’ scenario is for current
geopolitical risks to bring scarcity pricing forward. This would mean oil could
average US$120/barrel this year, hitting its 2008-levels at some point. This
scenario has several key implications for our bullish US growth expectations.