Economic Consequences of the High Oil Price

The average January petrol price in the US set a new all-time-high. The high petrol price acts like an additional tax for US consumers. An increase of 10 cents per gallon translates into an additional burden of USD 14bn per year for US households. Therefore we expect the high petrol prices in the US to affect the economy (even though the extent remains unclear).

Average January petrol price in the US (USD per gallon)

Sources: Zerohedge, Gasbuddy, Erste Group Research

In Europe, too, the higher oil price could soon trigger economic consequences. The price of Brent has already set new all-time-highs in euro. In this context, fears of deflation seem unfounded.

The price of Brent in EUR

Sources: Datastream, Erste Group Research

The OECD countries imported almost USD 1 trillion worth of oil in 2011. This represents an increase of USD 200bn on 2010. According to Jeff Rubin, the oil price increase in 2008 triggered the financial crisis, and the mortgage crisis was only a symptom of the high oil prices. Rubin claims that high oil prices have caused four of the five most recent global recessions . This is on the one hand due to consumption, which suffers, and on the other hand to the transfer of assets to exporting countries. The transfer of petrodollars in 2008 amounted to USD 700bn, 400bn of which were going to OPEC countries.

Oil price (logarithmic scale) and recessions (shaded)

Sources: Datastream, Erste Group Research

However, of course, there is clearly also causality the other way around, and recessions have likely contributed to the subsequent oil price decreases.

According to IEA, worldwide expenditure on oil accounted for almost 5% of global GDP in 2011. An “oil burden” (i.e. oil demand multiplied by the oil price divided by the nominal GDP) of 5% has been a critical value for the economy, historically speaking. At an average price of USD 150/barrel the share would amount to 7.5% in terms of GDP.

Oil price burden (% of GDP) vs. inflation-adjusted oil price 1970-2011

Sources: IEA, Datastream, OECD, Bloomberg, Erste Group Research

The Baltic indices have not recovered so far. The Baltic Dry index has fallen by more than 70% since November 2011. This means it is now at its lowest level since 2008 and 2000.

The Baltic Dry index is the benchmark index for global freight rates of bulk goods (among others iron ore, copper, gravel, grain, coal) and has thus traditionally been an important indicator for global trade. It therefore also served as reliable leading indicator for the oil price. The following chart shows that the Baltic Dry index has developed a massive divergence to the oil price, which has been widening.

To be fair, though, the capacities of the big shipping companies have increased significantly, which puts the reliability of the Baltic Dry index as a leading indicator for global trade into question. However, the Harper index, which reflects the global development of prices on the charter market for container ships, shows a similar negative tendency. Hence, it is unclear if the increases of the oil price are purely demand driven, or if other factors – e.g. monetary - have contributed.

Baltic Dry index vs. Brent

Sources: Bloomberg, Erste Group Research