Oil price shock redux? $200 a barrel ‘possible’

The world could see a repeat of the 2008 oil price shock this year if the Russia-Ukraine war escalates and an energy crisis blows up in Europe, an economist from the Asian Development Bank has warned.
rising oil prices

THE world could see a repeat of the 2008 oil price shock this year if the Russia-Ukraine war escalates and an energy crisis blows up in Europe, an economist from the Asian Development Bank (ADB) has warned.

In an Asian Development Blog, ADB Economic Research and Regional Cooperation Department economist Marcel Schröder said should this happen, prices of oil could reach $200 per barrel.

While this would not lead to significant changes in ADB’s GDP growth expectations for the region, it could increase inflation expectations by 1 percentage point to 4.6 percent.

“The possibility of a supply shock that leads to a large spike in the price of oil as high as $200 per barrel cannot be ruled out. For instance, an escalation of the war in Ukraine could be followed by an immediate European Union ban on Russian oil. It is unlikely that other oil-exporting countries would fill the resulting shortfall of 3.5–7 million barrels per day in the short run,” Schröder said.

A price of $200 per barrel is possible since oil prices peaked at $140 per barrel in June 2008. Schröder said this would be equivalent to $180 per barrel in today’s money.

Oil prices surged to $140 a barrel in June 2008 from $90 a barrel in January 2008.

Prices peaked at $147 a barrel in July 2008 and declined to $40 per barrel in December 2008.

Schröder said the surge in oil prices in 2008 was driven by supply disruptions, similar to what is happening today. The only difference is that this year, the world also has to deal with geopolitical issues that involve “sanctions against a major oil producer.”

Based on his estimates, the most benign impact is a 1-percentage point increase from ADB’s baseline assumptions in inflation to 4.6 percent this year. Inflation is also expected to average 2 percent next year.

“It is more plausible, however, that an escalation of the invasion together with an oil price shock of this size will set off significant secondary effects. One possibility is an increase in inflation expectations that requires additional monetary policy tightening, and which also results in falling consumer confidence and business sentiment,” Schröder said.

If persistent inflation occurs because of a $200-per-barrel oil, this could lead to an inflation rate of 5.3 percent in 2022. Developing countries in Asia will experience a marked growth slowdown to 3.8 percent in 2022, which is 1.4 percentage points below baseline.

In 2023, growth accelerates to 4.5 percent but remains 0.7 percentage points below the baseline. Headline inflation would surge even higher to 5.3 percent and 3.4 percent in 2022 and 2023, respectively.

Should the high oil prices lead to “global financial turmoil,” inflation is expected to reach 5.3 percent this year. Developing countries in Asia would only grow by 2.3 percent in 2023, while the G3 and several economies in the region see contractions.

In this scenario, Schröder said, the GDP level by the end of 2023 would be about 4 percent lower than in the baseline, which is about two-thirds of the size of the Covid-19 shock in 2020.

“Governments can help mitigate the impact of a high oil price.  Over the short term, they should implement measures to improve energy efficiency and other conservation policies to reduce petroleum fuel imports,” Schröder said.

In the medium term, governments must implement pricing and subsidy reforms in the energy sector to free up fiscal resources, Schröder added.

This would, in turn, provide support to vulnerable groups adversely affected by high energy prices.

Over the long term, Schröder said measures should be undertaken to strengthen energy security by diversifying the energy mix away from fossil fuels.

Countries must work toward low- or zero-carbon energy resources for power, heating, and cooling; as well as promote and invest in e-mobility vehicles and infrastructure.

Image credits: Evgenii Mitroshin | Dreamstime.com


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