FYI | Jul 25 2006
By Rudi Filapek-Vandyck
Any prophet of doom who believes the world economy will come to a grinding halt because of a spiking oil price over the next few months may have to revise his thinking a little bit after economists at UK based Lloyds TSB did some research on the matter.
Obviously, this is only the view by one set of economists, but nevertheless. On Lloyds’ estimates, the world economy would really feel the damage if the average oil price would hit US$120 a barrel and stayed there for at least one full year. The result would then be a world in recession, with global economic growth dropping as low as 2%.
Interestingly, the Lloyds research also found that the country most affected out of the major economies would be the UK, where growth would fall more sharply initially and subsequently would recover more rapidly as well.
The economists explain this due to the high level of UK household debt, which makes the country more susceptible to increases or cuts in interest rates.
A scenario of US$120 per barrel priced oil would pull back Chinese growth to about 6%, according to the Lloyds research.
The hypothetical model suggests such an good old fashioned oil shock would reduce global economic growth by 1.1% in the first year, but only by 0.3% by year three.
The report doesn’t specify whether Brent or WTI is used as a standard, we suspect it may have been Brent given the UK base of the economists involved. Brent tends to trade a few dollars cheaper than West Texan Intermediate.