THE IMPACT OF $100 CRUDE / THE FINANCIAL TIMES COMMODITIES DAILY ( HIGHLY RECOMMENDED READING )

Commodities daily: The impact of $100 crude

By Javier Blas

Published: December 16 2010 09:35

With oil prices firmly above $90 a barrel, the cost of energy is a mild threat to the global economy. The damage will intensify if prices move above $100 a barrel.


The impact matters in economic terms: some believe growth will be slower next year because energy is eating into consumers’ disposable income. It is also important for commodities investors: if economic growth slows, so will oil demand.


Currency variations will play a big role. Oil, like most commodities, is denominated in US dollars, so the exchange rate against major currencies, including the euro and sterling – but also the Indian rupee and the Chinese renminbi – will be critical.


As such, the impact of high oil prices – both in energy consumption but more importantly in economic growth – is not the same everywhere: in dollar terms, oil prices are about 37.5 per cent below their record high of almost $150 a barrel. At its current level, crude oil in dollars is trading where it was in November 2007, several months before the all-time high, which was not reached until July 2008.

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But the picture is more worrisome in European currencies. In euro terms, oil is only 25 per cent below its record peak of July 2008 and trading at the level of April 2008. The situation is even worse in sterling. Using the British currency, oil is 20 per cent below its all-time high of July 2008 and trading at the same level of May 2008.

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Europe, already suffering from weak economic growth, appears most at risk.

Meanwhile, developing countries seem quite insulated. Chinese consumers, for example, are faring better than Europeans. In renminbi, oil prices are a hefty 40 per cent below the all-time high of July 2008. Indeed, at current levels, oil prices in the Chinese currency are at the same level as they where in early September 2007. The story is similar in other emerging countries’ currencies.
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The analysis is important for oil investors: the engine of oil demand growth – China and the rest of the developing world – is so far quite insulated from the surge in prices. As such, expect oil demand growth to remain healthy in 2011. If you live in Europe, or worse, the UK, brace yourself for higher prices at the pump, but don’t blame the oil market. Think about the currency market instead.

Copyright The Financial Times Limited 2010