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Soaring Oil Prices Could Stun World Economic Growth

  • Joe DeCapua

Anti-Gaddafi rebels sit on the ground near an oil facility in Ras Lanuf, March 10, 2011. The rebel leadership said on Thursday that the oil port of Ras Lanuf in eastern Libya is under heavy bombardment.

Anti-Gaddafi rebels sit on the ground near an oil facility in Ras Lanuf, March 10, 2011. The rebel leadership said on Thursday that the oil port of Ras Lanuf in eastern Libya is under heavy bombardment.

The sharp rise in oil prices as a result of political turmoil in North Africa and the Middle East could deal a major blow to global economic growth over the next two years. Developing nations could be hit the hardest.

The increase comes as countries are still recovering from a global recession.

Britain’s Overseas Development Institute (ODI) says there could be an overall one percent decline in GDP, or Gross Domestic Product, which is the value of goods and services produced within a country. Some African countries could see a much bigger decline, possibly three to four percent.

An overall one percent decline translates into a loss of about $500 billion from the global economy. The overall sub-Saharan economy could lose $8 billion.

Dirk Willem te Velde, ODI’s head of program at the economic development group, says, “The oil price at the moment is about 40 percent higher than it was on average last year. So an increase in the price of oil by 40 percent will have quite some implications for the world economy and also developing countries and in particular oil importing countries.”

Some benefit, but many don’t

“An oil price increase,” he says, “may bring some benefits for oil exporters because they get increased revenues, although they need to spend it well. But of course there are still a lot of oil importers and particularly poorer countries. Poorer oil importers are still dependent heavily on fuel in their economies and more so than the richer economies, who have become more energy efficient.”

ODI research indicates Ghana, Lesotho, Swaziland, Togo, Honduras, Moldova and Nicaragua could lose more than three percent of their GDP to soaring oil prices.

Willem te Velde says, “The reduction in world GDP is because a higher oil price transfers money from countries with a higher propensity to spend to countries with a lower propensity to spend.”

He adds, “Because oil exporters, the OPEC countries, tend to spend less of their revenues immediately, that means that there’s less spending going into the world economy. They’ll save more and that will therefore reduce world GDP.”

Are the days of cheap oil over?

“It’s quite difficult to predict exactly what’s going to happen. Oil prices are notoriously difficult to forecast and I’ve tried to do that in the past and oil prices are extremely volatile. So, in that sense, it is very difficult to predict. But there are certain trends that tell us oil prices are likely to stay quite high, particularly in the near future, of course, due to recent conflict and turmoil in the Middle East, but also over the longer term because of the rise in the emerging powers and their demand for oil,” he says.

It’s unclear at this time just how high they may go.

ODI recommendations

There are some things developing countries can do to deal with the economic shocks.

"[The] first one is that countries could become more resilient to shock, so that whenever a shock hits their countries they should be able to react quickly and should be able to change their production structures quickly. But a second is one that is important at the moment with high oil prices, and it’s also important when we think about climate change… is that those oil importers that suffer most from high oil prices could become less oil dependent,” he says.

Dirk Willem te Velde recommends those countries invest in more energy efficient production methods or use renewable sources of energy, such as wind, solar and tidal wave power. Tidal power is a form of hydropower based on the tides caused by the gravitational pull of the sun and moon. Advances in turbine technology could make it more feasible.