The OPEC+ oil turmoil pushed oil prices to their highest level since 2018, at $80 a barrel.
Last year’s Saudi-Russian oil war showed that disagreements among OPEC+ members didn’t always lead to higher prices, but this week’s coldness within the group has driven prices higher, with gains of nearly 50% year-to-date.
The annual oil price percentage change is at levels seen more than 40 years ago. Currently around $75 per barrel, Brent crude oil prices are only half of 2008 prices. However, periods of such rapid movements scare the markets. The acceleration is sharper than seen even after the global financial crisis. The effects are expected to be temporary, but too high even for a temporary period.
Brent futures fell about 3% on Tuesday, but inflation could be more sustainable than expected if prices continue and/or rise at these levels. This will increase the risks of central banks to loosen the super-easy monetary policy.
Central banks’ temporary inflation rhetoric threatens to disrupt the post-pandemic economic recovery. Investors, central bankers and policy makers are debating whether the recent increase in inflation was temporary or real.
Inflation has reached record highs for the United States and most years high in many other places.
The market-based gauge of long-term inflation expectations in the eurozone rose to almost 1.65% on Tuesday, hitting its highest level since 2018. This is a sign that investors are positioned for higher inflation. Five-year breakeven inflation in the US rose sharply to 2.34% from last month’s low of 2.22%.
A mix of bottlenecks, global liquidity abundance, and rising commodity prices, including food, are adding to price pressures.
High petroleum adds a new dimension to the discussion. High oil prices are due to the potential effect of this temporary rising inflation in making it a little more medium-term.
About 80% of the gross domestic product (GDP) and emerging market economies are oil importers. As food and energy make up a higher portion of the inflation baskets, many are more susceptible to price pressures.
Countries like Russia or Brazil had to raise interest rates.
An increase in oil prices to $100 per barrel may cause energy inflation to exceed 20% in emerging markets.
Prolonged rise in oil prices will be negative for emerging market currencies, which hit a record high last month.
The oil-exporting Russian ruble will gain, while the currencies of the importing countries will likely take the hardest hit.
For the US dollar, the situation is less clear. In the past, high oil prices were negative as the US current account deficit widened, but the equation has changed since the US has become a net oil exporter.
A supply-driven contraction has historically been associated with the depreciation of the dollar, while higher oil prices, driven by increased demand, point to an ongoing global recovery.
These may not be alarm levels, but this comes at a time when economic expansion is culminating, particularly in the United States and China, that scares many.
Even in Europe, where growth is still accelerating, the impact of rising crude oil prices will be felt, potentially reducing consumer spending. High oil prices mean additional taxes for Europe and drive spendings in stress.
