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Fuel price rise caused by 'fear premium'
By Nouriel Roubini |
March 21, 2012, Wednesday
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Print Edition
Print Edition
TODAY'S fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices.
Gasoline prices in the US are approaching US$4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season. The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone.
Simply put, increasing worry about a military conflict between Israel and Iran has created a "fear premium."
The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices. The 1973 Yom Kippur war between Israel and the Arab states led to global stagflation (recession and inflation) in 1974-1975. The Iranian revolution in 1979 led to global stagflation in 1980-1982. And Iraq's invasion of Kuwait in the summer of 1990 led to the global recession of 1990-1991.
The risk that Israel's threat to attack Iran's nuclear installations will, in fact, lead to an outright military conflict may still be low, but it is growing.
If the drums of war grow louder this summer, oil prices could rise in a way that will most likely cause a US and global growth slowdown, and even an outright recession if a military conflict erupts and sends oil prices soaring.
Nouriel Roubini is professor of economics at New York University. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2012. www.project-syndicate.org
Gasoline prices in the US are approaching US$4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season. The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone.
Simply put, increasing worry about a military conflict between Israel and Iran has created a "fear premium."
The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices. The 1973 Yom Kippur war between Israel and the Arab states led to global stagflation (recession and inflation) in 1974-1975. The Iranian revolution in 1979 led to global stagflation in 1980-1982. And Iraq's invasion of Kuwait in the summer of 1990 led to the global recession of 1990-1991.
The risk that Israel's threat to attack Iran's nuclear installations will, in fact, lead to an outright military conflict may still be low, but it is growing.
If the drums of war grow louder this summer, oil prices could rise in a way that will most likely cause a US and global growth slowdown, and even an outright recession if a military conflict erupts and sends oil prices soaring.
Nouriel Roubini is professor of economics at New York University. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2012. www.project-syndicate.org
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