Oil. A barometer for the global economy?

Date: 01 Jun 2009

Publication: Sunday Independent Business, Short View

Author: Professor Eamonn Walsh

Seeking a barometer for the global economy? Consider oil. From July 2007 to February 2008, oil prices declined by 80 per cent. Now, oil is back up by 40 per cent. This increase is driven by the hope that the worst is over. Declines reflect fears of long-term economic stagnation. High global growth creates a fundamental imbalance in the oil markets.

For example, growth translates into the demad for personal transportation in Asia. Few substitutes exist for petrol (solar-powered cars?). If growth resumes, oil prices are expected to spike. Oil is costly to store.

There are medium-term limits to oil production. These medium-term limits are also curtailed by declining oil field investments this year. Therefore, rapid increases in oil demand lead to price spikes. A stagnating global economy will be reflected in oil price declines this summer.

It is no accident that an oil price peak occurred last July. The holiday season is a potent indicator of US consumer sentiment. It also involves large quantities of oil-fuelled transportation.

Barometers are simplistic. Weather systems are complex. Oil prices are an equally simplistic gauge of the global economy. But credible economic statistics are published months after the event. Oil prices are timely and immediate. They impound expectations of short-term economic activity.

If oil prices of $60 are sustained this summer, the worst may well be over. Oil at less than $50 per barrel will puncture the optimism of the past two months. Lower oil prices will imply continuing caution and no immediate prospects of the "green shoots" of recovery.

Eamonn J Walsh, PWC Professor of Accounting, UCD Michael Smurfit Graduate Business School

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Oil. A barometer for the global economy?

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