Baku, Azerbaijan, April 25
By Leman Zeynalova – Trend:
The recent rise in oil prices is likely to be reversed, the UK-based consulting company Capital Economics said in its report obtained by Trend.
But even if prices rose steadily to $100 per barrel, there would be little fallout for global growth, despite an increase in headline inflation, according to the report.
“The recent jump in the price of Brent crude from $62 per barrel in mid-February to $75 per barrel has occurred despite equity markets remaining fairly weak. It seems to have been driven by concerns about supply, rather than strong demand, and particularly by geopolitical tensions in the Middle East,” said the company. “ As it happens, we think oil prices will probably drop back over the next couple of years.”
There are several obstacles in the way of new and effective sanctions on Iran and other geopolitical worries will fade too, the experts of Capital Economics believe.
“Higher prices should also lead to a further increase in drilling activity in the US, which should exert more downward pressure on prices. Our forecast is for Brent to drop to $55 per barrel by end-2019. If it turns out that we are wrong and Brent prices rise steadily to $100 per barrel by end-2020, inflation in the coming year or two would average some 0.5 percentage points higher than it would be based on our forecasts. However, this effect would be short-lived and core inflation would remain lower,” said the report.
What’s more, short-term inflation expectations may not rise much as they have decoupled from oil prices recently, according to the company.
“As such, policy-makers would probably “look through” the increase rather than tightening policy. Finally, higher oil prices would have a mixed impact on economic activity. There would probably be a small negative effect on household consumption due to the drag on real incomes. This could, for example, lead to weaker growth in Europe,” said the report.
But in the US, where oil output has risen from 8.5 to 10.5 million barrels per day since mid-2016, this would be partly offset by a rise in investment in the shale industry and oil producers in the Gulf and perhaps elsewhere would be likely to ease up on austerity, according to the Capital Economics.
All in all, the world economy should remain fairly resilient even if oil prices were to continue on a steady upward trend, the company experts believe.
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