Sunday, February 26, 2012

High Oil Prices, Iran and the Global Economy

As Middle East tensions continue to increase, the United Nation’s International Atomic Energy Agency reported last week that Iran is ramping up its production of high-grade uranium.  As a result, oil prices continue to rise -  a barrel of Brent crude oil traded up to $125 in Europe (+17% YTD), while WTI oil in the U.S. traded at $109 a barrel (+11% YTD) on Friday (see long-term price trend chart on page 3). Other contributing factors include: 1) oil supply disruptions in Sudan, Syria and Yemen, 2) increased oil demand as the global economy expands, 3) a possible increased gasoline demand during the summer driving season and 4) speculative commodity trading activity. 


Given oil’s pervasive use across the global economy, persistently high prices may broadly increase product input costs (affecting corporate profits) and dampen consumer spending (wage growth still remains stagnant) – factors that could stress the fragile economic recovery.  Investors have focused on the benefits of reflation (central bankers printing money) which has driven many asset prices higher.  A period of elevated oil prices could move the discussion toward the potential for inflation (short term) and deflation (longer term).

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