Alwaght – The oil prices are rising, and this is turning into a major debate of the world leaders on the global stage, mainly the United Nations General Assembly meeting, as higher prices of energy can substantially influence the global economy. On Tuesday, the Brent oil price reached 82.55, the highest since 2014, after four tough years for the industry. The rise drew reaction by the US President Donald Trump.
“OPEC nations are, as usual, ripping off the rest of the world and I don’t like it,” Trump said in a speech to the UNGA in New York on Tuesday.
“We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We’re not going to put up with it — these horrible prices — much longer.”
A couple of days earlier he had asked the Oil Producing and Exporting Countries to raise the level of their oil production. The experts suggest that they expect the crude prices to keep rallying, with a prediction, to Trump’s frustration, to see them touch the $90 and even $100 by the end of the year.
Why are oil prices rising?
The Global Energy Fund has predicted that by the end of this year, the oil prices will go beyond $90 because as the supply drops, demand increases, and the major consumers see a drop in their energy reserves.
Some energy trading companies even expect higher prices. For example, Mitsubishi UFJ and Financial Group said that the crude prices could hit $100 this year.
One major reason pushing up the prices is connected to the concerns over a drop in oil production in the upcoming months. The US has said it will reinstate sanctions on Iran’s oil industry in November to push down the Iranian sales to “zero”. This comes while the experts suggest that the major suppliers like Saudi Arabia, which said it was ready to fill the Iranian place when the embargo comes into effect, cannot accomplish their promise. At the OPEC meeting, held on Sunday in Algeria, the Saudis said they cannot raise increase their production this month higher than the current level.
As a result, the fears of the deficit are forcing up the global oil demand. The major demands come from the emerging big economies like China and India, both going the industrialization course fast. To keep their fast growth rates, the two countries need to make sure that they will not fall short of energy for their industrial consumption.
Another reason for the 2 percent rise, the experts say, is linked to the US threatening Venezuela, also an OPEC member with “actions” amid a crippling political crisis in the Latin American nation. So, while its policies are a key factor in the oil price surge, the US stands in the place of an accuser shifting the blame on the oil producers.
How will the global economy be affected?
Since the mid-1950s, oil rose to become the top energy source across the world. The strategic commodities have been the dynamic for the industrialized world. Oil stands basis for production of plastic, fertilizers, cleaners, paint, even some medications, and many other things. Furthermore, this energy source is used to produce electricity and transportation vehicles’ fuel.
The wide range of the oil usage in today’s world gives a clear picture of how important this energy is. Potentially, higher energy prices can mean slower world economic growth and higher inflation. The economists argue that after the WWII, high oil prices stood a basis for almost any economic recession in the global economy. An example is the 1970 oil prices shock that caused lower growth and higher inflation and unemployment rates in the major economies.
The oil prices rose almost 7 percent last year while analysts predicts it will reach 25 percent by the end of the second quarter of 2018. Higher oil prices will very likely push the world recession rate to 34 percent in 2020, up from the 28 percent before the oil prices increase.
Increased crude prices will mean slowed down production and supply of goods as the manufactures will face higher production prices. This is even more serious if the produced goods and services are oil-based. Higher oil prices, on the other side, can force down the demand for goods as the consumers will suffer higher costs of living and thus a drop in their purchasing power. Such a situation causes uncertainty about the future, which again stands as a motivation for lower consumption rates.
Additionally, higher oil prices can press up the American dollar value and thus the shares in the US stock markets. This, in turn, will inflict a damage of slowing down on the now-gaining American stock markets. The Chief Market Strategist Greg McKenna of AxiTrader, a firm active in the global stock markets, has told the AFP news agency that higher oil, pressures for higher salaries, and a strong performance of the US economy in the second quarter will push the US Federal Reserve to the conclusion that the increase in interest rates needs to continue. This will mean that the US products will be less competitive abroad and so the American companies will witness fewer sales and thus less income.
From another dimension, the pressure of the increased oil prices on the emerging economies can seriously challenge the global economic cycle. Increased costs of production for these countries will push their governments to introduce tax cuts to the manufactures in support. This will have consequences for the governments. One will be the budget deficit as a result of less income. Any smaller drop in the oil supply in the global markets will have a damaging effect on such countries as Turkey and Argentina.
So, the Trump concerns are highly serious. After all, he needs to maintain the current over 4 percent growth rate to win the second term of the presidency while there are doubts about if he can successfully end the first term.