Can the Current Rise in Crude Prices Lead to Yet Another Recession?
Can the Current Rise in Crude Prices Lead to Yet Another Recession
?
If we revisit our economic history we will find that almost all the recessions of modern era were preceded by unprecedented rise in crude oil prices. If we take a clue from this fact we might be nearing yet another double dip recession. Some of the events in recent past have caused the crude prices to increase by more than 50%. Major reason for this steep price hike is attributed to civil unrest in Middle East regions which accounts for more than half of world's crude production. Let us discuss and analyse if this recent price hike could plunge the world back to recession as witnessed few years back.
What happened in Year 2008?
In the year 2008 crude oil prices went past $ 140/ barrel level which caused shifting of economic equilibrium. Just before the recession things looked picture perfect and investors were bullish about various projects. Within time span of few months things were totally reversed; investors were seen opting of their commitments and future plans were kept on hold. Entire world was adopting the wait and watch policy and didn't knew what to do. Millions of people lost their jobs; industrial outputs declined considerably, disposable income in the hand of a common man eroded; as a result there was much lesser demand for a number of commodities including crude. World leaders got together and a huge support package was announced by almost every country in the world along with IMF, which pushed the world economy out of the depression.
What is happening in Year 2011?
Though reasons may be different but the sequence of events leading to the 2008 depression remains same even in year 2011. This time it is the civil unrest in the Middle East and Northern African region which has caused the oil to reach levels of $ 120 /barrel. This region is very rich in oil production and supplies to more than 50% of the world total requirement of crude oil. This political unrest bears direct effect on rising crude prices because of following reasons:
Continued unrest could reduce oil producing and refining capacity of the region considerably and hence adversely affecting the supply side.
The current unrest could aggravate and even hamper movement of oil cargo from the region.
Political unrest in these countries would mean more differences in OPEC member countries leading to reduction in their strength to firmly deal in controlling prices.
Additional pressure of the countries non-effected by this unrest which will result in prices going further upwards.
What can happen next?
If things are not put to their logical conclusion and the current political unrest continues in Middle East and Northern African countries the crude prices may raise further. Persistent high Crude Oil prices will negate all the positives steps taken by many countries to come out of 2008 recession and push them further back into same unwanted situation. It is high time at International Economic Community gets together and finds a way out of this current situation before things get any worse.