“Over the past 50 years, when oil prices moved up sharply, causing inflation, or remained high with annual average price around $100, recession has followed in many OECD countries (see example for UK below the fold). As of 24th May 2011 the annual running average for Brent was $91.33.
The key questions are: 1) Has the world economy adapted to higher energy prices that may enable oil prices to go higher than the 2008 spike? or 2) Is the weakened world economy more vulnerable to higher energy prices?
With USA debt at its legal ceiling, QEII (US quantitative easing) due to expire at the end of June, the PIGS sovereign debt crisis deepening in Europe, consumer goods inflation taking root in the UK and other countries and deep public spending cuts impacting OECD economies, a period of great uncertainty lies ahead.
Figure 1 Daily Brent oil prices in red and the annual running average in blue. On current trajectory, the annual average will reach $100 / bbl this Fall. Is the recent spike the new top of the oil price cycle? Or has the World economy adapted to high energy prices? Daily oil price data from the EIA.
Global events have moved extremely fast during the first half of 2011. It has been hard to keep up. Amidst the turmoil of earthquake, tsunami, and nuclear meltdown in Japan, “The Arab Spring”, war with Libya and the assassination of Osama bin Laden, oil prices have also shot up from around $80 to >$120.”
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