High oil price raises spectre of recession

Published March 6th, 2012 - 12:59 GMT
World equities and oil have typically been closely correlated since 2008 because both were driven by global demand
World equities and oil have typically been closely correlated since 2008 because both were driven by global demand

A jump in energy prices is jamming the slow-turning cogs of an economic recovery in the West, but that may be nothing compared to the economic shock an Israeli attack on Iran would cause. Oil rose to a 10-month high above $125 a barrel, prompting responses from policymakers around the world including US President Barack Obama, watching US gasoline prices follow crude to push towards $4 a gallon in an election year.

Europe may have more to fear as its fragile economic growth falters and Greece, Italy and Spain look for alternative sources to the crude they currently import from Iran, where an EU oil embargo, intended to make Iran abandon what the West fears are efforts to develop nuclear weapons, comes into force in June. In euro terms, Brent crude rose to an all-time high of 93.60 euros this week, topping its 2008 record. “The West’s determination to prevent Iran acquiring nuclear weapons is coming at a price - a price that might include a second global recession triggered by an oil shock,” said David Hufton from the oil brokerage PVM. In dollar terms, oil prices are still some $20 a barrel short of their 2008 record of $147. But the latest Reuters monthly survey will show oil analysts revising up their predictions for Brent crude by $3 since the previous month.  Such a change is big in a poll of over 30 analysts, and last happened at the peak of the Libyan war in May.

Ian Taylor, head of the world’s biggest oil trading house Vitol, told Reuters prices could spike as high as $150 a barrel if Iran’s arch-enemy Israel launched a strike at its nuclear facilities - an option Israel has declined to rule out. “I used to think this would never happen,” Taylor said, “but everyone you speak to says the Israelis will have a go at striking at Iranian nuclear sites. “The day that happens, you have to believe the Iranians throw a few mines in the Strait of Hormuz and, for a few hours at least or maybe more, I cannot see a scenario where prices would not be at that sort of level ($150).”

The UN nuclear watchdog said Iran had sharply stepped up its uranium enrichment, which Iran insists is solely for civilian purposes. Israel has warned that, by putting much of its nuclear programme underground, Iran is approaching a “zone of immunity”, but it has also said any decision to attack is “very far off”. Wall Street bank Merrill Lynch said this week that oil prices could climb to $200 over the next five years. So far this year, dollar prices for Brent crude have risen by more than 15 per cent, pushed up mainly by fears about Iran. The loss of supply from three small and mid-sized producers suffering internal turmoil - Syria, Yemen and South Sudan - has added to the supply worries.

A stabilisation of the US economy may explain some of the rise in oil prices, but the global economy is growing far more slowly now than at this time last year, yet crude prices are just as high. World equities and oil have typically been closely correlated since 2008 because both were driven by global demand.


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