Should You Be Worried about Rising Oil Prices?

Earlier this week, I discussed how rising oil prices make recovery more slippery while pointing out that it isn’t always bad news. However, tensions in the Middle East seem to be getting worse each day, putting additional upward pressure on oil prices.

Just after the Oscars buzz simmered, the U.S. Treasury Department gave market watchers another reason to feel nervous as they decided to disrupt the operations of Dubai’s Noor Islamic Bank, Iran’s primary channel for its international oil transactions. Apparently, the U.S. discovered that Iran had been processing its sales through Noor Islamic Bank to sidestep the oil sanctions imposed by the West. Sneaky, huh?

Then, a couple of days ago, concerns about an oil supply disruption came back to haunt the markets when rumors of a pipeline blast in Saudi Arabia hit the airwaves. This was enough to push crude oil futures past the $110 per barrel mark, even though Saudi officials claimed that the reports were as true as Mr. Bean’s death hoax that also circulated lately.

As you’ve probably observed, crude oil prices seem to be extra sensitive to just about anything related to the Middle East. It doesn’t help that Israel recently announced its plans to conduct a ballistic interceptor missile test, stoking fears of a full-blown war in Iran.

With the standoff between Iran and the West not expected to ease anytime soon, the surge in oil prices could be far from over. Who should be worried about this?

Central banks

As you’ve learned in the School of Pipsology lesson on monetary policy, one of the main goals of central banks is to maintain price stability. At the rate crude oil prices are advancing these days, several central bank officials must be feeling really uneasy about its impact on inflation.

Bear in mind that a couple of central banks, namely the BOE and ECB, have decided to inject additional liquidity into their money supply earlier this year to help keep their respective economies afloat. Further easing, combined with the upward pressure of higher oil prices on inflation, could pose a huge threat to price stability.

Governments

Rising oil prices also pose a difficult challenge for countries currently undergoing strict austerity measures. Imagine if you were given lower wages, forced to pay higher taxes, and now have to pay more for gas? Wouldn’t you be up in arms with the rest of your fellowmen in the streets?

Unfortunately for governments that have no choice but to implement belt-tightening measures in order to keep their finances in check, widespread opposition to these spending cuts could grow even worse as taxpayers struggle to make ends meet.

Consumers

Higher gas prices

Hey, that includes you and me! If you’ve refilled your gas tank last week, then you definitely know what I’m talking about. Don’t forget that higher fuel prices are also being taken into account by manufacturing companies, which means that they might decide to increase the prices of goods that they sell. This could eventually lead to a big spike in price levels, which I’m sure our wallets won’t appreciate!

With the risks of a global debt crisis or a double-dip recession still not completely out of the picture, surging oil prices and the possibility of inflation spinning out of control could further complicate things. Interestingly enough, most of the debt and growth problems are concentrated in the West yet they are partly to blame for fueling concerns about an oil supply shock. Are they bringing about their own undoing? Let us know what you think by voting through the poll below!

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