Rising Oil Prices Make Recovery More Slippery

It ain’t just Angelina Jolie’s leg that’s been getting a lot of buzz. While Hollywood junkies gossip about who wore what at the Oscars, market participants just couldn’t stop themselves from talking about crude oil. Here’s the latest scoop on black crack.

Brent Crude ended its winning streak on Monday, closing 1.30 USD below its open price at 124.17 USD per barrel. But before you get too excited, you should know that it is still trading around its 10-month high! A few analysts did the math and said that at its current pace, it’s not hard to imagine crude oil post an 11% gain for February.

Brent Crude Oil in 2012

For the most part, economic gurus point to tensions in Iran as the cause for surge in oil prices. After all, the country exports around 2.4 million barrels of the 4.2 barrels per day that it produces. But following the most recent Iran vs. West battle, OPEC’s second-largest oil producer has stopped exporting to certain countries. Consequently, this has curbed the available supply of oil in markets and put an upward pressure on its price.

But is it always bad news when the price of oil increases?

Sure, sometimes the rise in oil prices can be attributed to improving economic growth when consumers have more money for petrol. However, in our current situation, analysts believe that high oil prices can take a significant toll on global economic growth.

Take emerging economies, for example. While energy-producing economies like Russia and Brazil are enjoying more income from the recent surge in oil prices, other oil-dependent economies might not be so lucky.

Oil expenses usually take up a big chunk of the emerging markets’ production costs. So if oil continues to rise faster than Meryl Streep can win another Oscar, then economic growth might soon choke. Heck, Hungary’s, Thailand’s, and South Korea’s oil imports already exceed 5% of their GDP!

Not even the big U.S. economy is immune from the expensive black crack. Word on the streets is that the growth in the U.S. can slide by as much as 0.2% to 0.3% for every $10-increase in crude oil. And with the euro zone debt crisis already knocking on investors’ doors, it’s no wonder traders are starting to believe that Big Ben might need to implement QE3 sooner than the Fed thought!

Speaking of which, my last but definitely not the least concern over rising oil prices is its potential impact on the euro zone. G20 finance and economic hotshots have already voiced out their oil concerns in their meeting last weekend, which is probably why European stocks failed to rally significantly despite the progress made on the Greek bailout.

We have no idea exactly when the sharp rise in oil prices would level off, but I think everyone will agree with me that it needs to happen soon! The recent surge in the price of the commodity is unsustainable and poses major risks to every economy, regardless of whether it can produce its own oil or it has to import it.