Take Iran for example. It has a deteriorating fiscal and balance of payments position, which can realistically only be remedied in the short run by a dramatic improvement in oil prices. Would Iranian President M. Ahmedinejad take advantage of the israel/palestinean situation to up the foreign policy rhetoric? Would they demonize themselves politically by playing hardball with regard to the Non Proliferation Treaty and Nuclear weapons? Maybe! If i were in Ahmendinejad's shoes, perhaps i would just enough to raise the level of political and economic risk within the region to see oil prices higher. After all the alternative is lower oil prices, social instability. I dont think its too far of a stretch of the imagination. N. Korea has played this game so often in order to get US aid handouts, particularly under the Clinton Administration.
But what are the implications of higher oil prices under the current economic back drop? Well, i think very negative and imply a further deterioration in the growth outlook and a longer period of general economic malaise:
- A supply-side oil shock could lead to stagflation
- Companies' profit margins would likely get squeezed, weighing on profitability.
- Global equity markets would get hit as profits decline on the back of smaller margins, combined with consumers tightening their belts.
- Business investment would decline on the back of price volatility, combined with slowing growth, tighter credit conditions and shrinking profits.
- We would see the continued redistribution of dollar reserves away from oil importing countries to oil exporting countries, while also improving their terms of trade.
No comments:
Post a Comment