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Higher oil prices reflect both supply
concerns and rising global demand
QE is adding to oil price increases as
well by ‘turbo-charging’ EM growth
Higher oil prices will imply more
monetary easing from the west but EM
will respond by quantitative tightening
Oil prices are edging up again. Why are prices rising?
Western policymakers have been accused of stoking oil and
wider commodity price rises through quantitative easing. We
believe that oil price increases are still a function primarily
of higher emerging market demand and supply side concerns
especially related to Iran. Our analysis shows only limited
impact of direct speculative activity on oil prices, but QE is
playing a role in pushing oil prices higher as well by turbocharging
EM world growth.
What will be the impact of further oil price rises? The
historical link between a slump in developed economy
growth and lower oil prices globally has been broken, since
emerging markets now account for nearly half of oil
consumption. Higher global oil prices lead to a drop in nonenergy
consumer spending in developed economies. In many
emerging economies, the biggest threats are inflationary.
What should the policy response to higher oil prices be?
Developed world monetary easing has been ineffective to the
extent that it has stoked oil price increases, resulting in an
unfavourable growth-inflation trade-off. But we expect
monetary easing including QE to remain the main response
to oil price increases. The costs to slow growth are much
higher than the risk of runaway inflation in an environment
of high unemployment and low wage increases.
For a number of emerging markets, inflation will ultimately
be the main concern, which will favour monetary tightening
albeit unconventional tightening. The first line of defence is
likely to be fiscal policy, in particular price controls and
subsidies, with monetary policy aimed at preventing second
round effects on inflation. In terms of fiscal health, it would
seem that Asia is better placed than other regions to deal
with an oil price shock (
Oil’s worth
Globally, the US and other economies seem to be
showing signs of stabilisation, raising hopes that
this year will be the start of a real period of recovery
for the western world. But we’ve been here before,
at the start of 2011 when the growth outlook seemed
similarly rosy. That optimism faded quickly as the
world economy was buffeted by the impact of the
tsunami and earthquake in Japan but more
importantly by the surge in oil prices that followed
the loss of oil supply from Libya.
Undoubtedly, stable or falling oil prices in 2012
would be a boon, with inflation set to ease as the
energy component falls out of the equation. This
in turn, would allow authorities more room to
focus on growth.
But oil prices have started to rise again over the past
few weeks – edging back to USD120 per barrel
levels – and threaten to throw a spanner in the works
for global growth. And both 2008 and end
2010/early 2011 are reminders of the fact that oil
prices can move fairly quickly in either direction.
We repeatedly get asked by our clients whether
this increase is all down to supply-side disruptions
or is a massive speculative bubble aided by QE
money. How can oil prices stay so high when we
have just been through the worst financial crisis
since the Great Depression? What is the right
price for oil really? And does it matter whether
this price rise is driven by supply shocks or
demand increases?
In this piece we try to answer a few key questions:
Why are oil prices rising? Is monetary
policy easing in the west stoking oil price
gains? We conclude there is only limited
impact from direct speculative activity, but
rather that QE is fuelling EM growth and
demand, pushing oil prices higher. Supplyside
concerns including Iran are only adding
to the oil prices increase.
Should we worry about growth or inflation
as a consequence? The impact will differ
between developed and emerging market
countries. For developed countries, the
growth slowdown will outweigh any inflation
risks while for emerging markets, inflation
will be the bigger threat. We find that besides
the net oil exporters, countries in Asia seem
best placed to deal with an oil shock in terms
of their fiscal health while those in central and
eastern Europe are most constrained.
What is the appropriate policy response to
oil price shocks? Will the actual response
be different? An unintended consequence of
QE has been a rise in oil prices globally
which has made it more difficult for central
banks in the western world to achieve their
growth and inflation targets. However, further
oil price increases will encourage more
accommodative monetary policy and possibly
even more QE to prevent a complete collapse
of developed world growth. EM central
banks should focus on inflation and tighten
monetary policy. But more QE in the west
will mean more quantitative rather than
traditional policy rate tightening in emerging
markets. Fiscal policy can be used in these
countries to offset some of the impact on the
poor. In terms of fiscal health, Asia looks best
placed to deal with an oil price surge
compared to other regions.
Speculating on oil
Evidence of an increase in speculative activity on oil is limited…
…but QE has contributed to the surge in oil prices…
…by ‘turbo-charging’ emerging world growth and demand
Coping with reality
Fundamentals suggest oil prices are on an extended uptrend…
…burning bigger holes in western consumers spending capacity
Emerging market consumers are less exposed but not immune
Policy response
Despite its drawbacks, more QE will remain the main policy
response for developed countries…
…as growth fears outweigh inflation concerns
EM countries can still go down the fiscal route first, but will have to
tighten monetary policy ultimately to mitigate inflation fears
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher oil prices reflect both supply
concerns and rising global demand
QE is adding to oil price increases as
well by ‘turbo-charging’ EM growth
Higher oil prices will imply more
monetary easing from the west but EM
will respond by quantitative tightening
Oil prices are edging up again. Why are prices rising?
Western policymakers have been accused of stoking oil and
wider commodity price rises through quantitative easing. We
believe that oil price increases are still a function primarily
of higher emerging market demand and supply side concerns
especially related to Iran. Our analysis shows only limited
impact of direct speculative activity on oil prices, but QE is
playing a role in pushing oil prices higher as well by turbocharging
EM world growth.
What will be the impact of further oil price rises? The
historical link between a slump in developed economy
growth and lower oil prices globally has been broken, since
emerging markets now account for nearly half of oil
consumption. Higher global oil prices lead to a drop in nonenergy
consumer spending in developed economies. In many
emerging economies, the biggest threats are inflationary.
What should the policy response to higher oil prices be?
Developed world monetary easing has been ineffective to the
extent that it has stoked oil price increases, resulting in an
unfavourable growth-inflation trade-off. But we expect
monetary easing including QE to remain the main response
to oil price increases. The costs to slow growth are much
higher than the risk of runaway inflation in an environment
of high unemployment and low wage increases.
For a number of emerging markets, inflation will ultimately
be the main concern, which will favour monetary tightening
albeit unconventional tightening. The first line of defence is
likely to be fiscal policy, in particular price controls and
subsidies, with monetary policy aimed at preventing second
round effects on inflation. In terms of fiscal health, it would
seem that Asia is better placed than other regions to deal
with an oil price shock (
Oil’s worth
Globally, the US and other economies seem to be
showing signs of stabilisation, raising hopes that
this year will be the start of a real period of recovery
for the western world. But we’ve been here before,
at the start of 2011 when the growth outlook seemed
similarly rosy. That optimism faded quickly as the
world economy was buffeted by the impact of the
tsunami and earthquake in Japan but more
importantly by the surge in oil prices that followed
the loss of oil supply from Libya.
Undoubtedly, stable or falling oil prices in 2012
would be a boon, with inflation set to ease as the
energy component falls out of the equation. This
in turn, would allow authorities more room to
focus on growth.
But oil prices have started to rise again over the past
few weeks – edging back to USD120 per barrel
levels – and threaten to throw a spanner in the works
for global growth. And both 2008 and end
2010/early 2011 are reminders of the fact that oil
prices can move fairly quickly in either direction.
We repeatedly get asked by our clients whether
this increase is all down to supply-side disruptions
or is a massive speculative bubble aided by QE
money. How can oil prices stay so high when we
have just been through the worst financial crisis
since the Great Depression? What is the right
price for oil really? And does it matter whether
this price rise is driven by supply shocks or
demand increases?
In this piece we try to answer a few key questions:
Why are oil prices rising? Is monetary
policy easing in the west stoking oil price
gains? We conclude there is only limited
impact from direct speculative activity, but
rather that QE is fuelling EM growth and
demand, pushing oil prices higher. Supplyside
concerns including Iran are only adding
to the oil prices increase.
Should we worry about growth or inflation
as a consequence? The impact will differ
between developed and emerging market
countries. For developed countries, the
growth slowdown will outweigh any inflation
risks while for emerging markets, inflation
will be the bigger threat. We find that besides
the net oil exporters, countries in Asia seem
best placed to deal with an oil shock in terms
of their fiscal health while those in central and
eastern Europe are most constrained.
What is the appropriate policy response to
oil price shocks? Will the actual response
be different? An unintended consequence of
QE has been a rise in oil prices globally
which has made it more difficult for central
banks in the western world to achieve their
growth and inflation targets. However, further
oil price increases will encourage more
accommodative monetary policy and possibly
even more QE to prevent a complete collapse
of developed world growth. EM central
banks should focus on inflation and tighten
monetary policy. But more QE in the west
will mean more quantitative rather than
traditional policy rate tightening in emerging
markets. Fiscal policy can be used in these
countries to offset some of the impact on the
poor. In terms of fiscal health, Asia looks best
placed to deal with an oil price surge
compared to other regions.
Speculating on oil
Evidence of an increase in speculative activity on oil is limited…
…but QE has contributed to the surge in oil prices…
…by ‘turbo-charging’ emerging world growth and demand
Coping with reality
Fundamentals suggest oil prices are on an extended uptrend…
…burning bigger holes in western consumers spending capacity
Emerging market consumers are less exposed but not immune
Policy response
Despite its drawbacks, more QE will remain the main policy
response for developed countries…
…as growth fears outweigh inflation concerns
EM countries can still go down the fiscal route first, but will have to
tighten monetary policy ultimately to mitigate inflation fears
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