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13

Oil Price Won't Be Economic Crisis Cause

Despite international oil prices having surged to fresh record highs today, the situation is not yet a cause for panic

Despite international oil prices having surged to fresh record highs today, the situation is not yet a cause for panic, according to Absa industry analyst John Loos, The Resource Investor reports.

Oil prices surged to over $70 a barrel on fears that Hurricane Katrina would threaten oil production in the Gulf of Mexico.

Commenting on the impact of the recent oil price rises in a research paper published today, Loos said that while the current high oil prices could prove to be mildly negative for domestic economic growth, other factors could cushion the blow for SA.

It was possible that petrol prices in Gauteng could reach R6 rand per litre (93 leaded) at the pump by October, he noted, thus pushing CPIX inflation (headline consumer inflation less mortgage rate changes) higher to around 5% in October.

However, Loos said, compared to the two oil shocks of the 1970s, the world is much more energy-efficient now, with the spot price of Brent crude oil having to rise above $100 per barrel to equal the peak price of the second 1970s oil shock, while still having less of an impact on global economic growth.

"At the present time, therefore, it is probably premature to talk of a global recession such as was the result of the 1970s oil shocks," he writes.

"However, it is necessary to take the threat quite seriously, and to consider the potential implications."

Although the consequences of a slowdown in world growth would be negative for South African exports, two offsetting factors cited by Loos were that these shocks had proved to be short-lived in the past and followed by a significant decline in oil prices (thanks to much weaker demand).

At the same time, he pointed out, underlying inflation sparked by rising oil prices in the U.S. would cause likely cause the Federal Reserve to begin cutting interest rates shortly after an oil shock.