Return of the oil shock? $200 a barrel “possible”

The world could see a repeat of the 2008 oil price shock this year if the Russian-Ukrainian war escalates and an energy crisis erupts in Europe, an Asian Development Bank (ADB) economist has warned.

In a blog post on Asian development, economist for the AfDB’s Department of Economic Research and Regional Cooperation, Marcel Schröder, said that if this happens, oil prices could hit $200 a barrel.

While this would not lead to significant changes in AfDB GDP growth expectations for the region, it could raise inflation expectations by 1 percentage point to 4.6%.

“The possibility of a supply shock that would result in a sharp spike in the oil price of up to $200 a barrel cannot be ruled out. For example, an escalation of the war in Ukraine could be followed by an immediate ban by the “Russian Petroleum Union. Other oil-exporting countries are unlikely to make up the shortfall of 3.5 to 7 million barrels per day in the near term,” Schröder said.

A price of $200 a barrel is possible since oil prices peaked at $140 a barrel in June 2008. Schröder said this would equate to $180 a barrel in today’s currency.

Oil prices jumped to $140 per barrel in June 2008 from $90 per barrel in January 2008.

Prices peaked at $147 per barrel in July 2008 and fell to $40 per barrel in December 2008.

Schröder said the spike in oil prices in 2008 was due to supply disruptions, similar to what is happening today. The only difference is that this year the world also has to deal with geopolitical issues that involve “sanctions against a major oil producer”.

Based on its estimates, the most benign impact is an increase of 1 percentage point from the AfDB’s baseline inflation assumptions of 4.6% this year. Inflation is also expected to average 2% next year.

“It is more plausible, however, that an escalation of the invasion accompanied by an oil price shock of this magnitude would trigger significant side effects. One possibility is an increase in inflation expectations that requires further monetary policy tightening, and which also leads to lower consumer confidence and business sentiment,” Schröder said.

If persistent inflation occurs due to oil at $200 a barrel, this could lead to an inflation rate of 5.3% in 2022. Developing countries in Asia will experience a marked slowdown in growth at 3.8% in 2022, i.e. 1.4 percentage points below the baseline. .

In 2023, growth accelerates to 4.5% but remains 0.7 percentage point below the baseline. Headline inflation would increase even more to 5.3% and 3.4% in 2022 and 2023, respectively.

If high oil prices lead to “global financial turmoil”, inflation is expected to reach 5.3% this year. Developing Asia would only grow by 2.3% in 2023, while the G3 and several economies in the region would see contractions.

In this scenario, Schröder said, the level of GDP by the end of 2023 would be about 4% lower than in the baseline scenario, or about two-thirds the size of the Covid-19 shock in 2020.

“Governments can help mitigate the impact of high oil prices. In the short term, they should implement measures to improve energy efficiency and other conservation policies to reduce petroleum fuel imports,” Schröder said.

In the medium term, governments should implement price reforms and subsidies in the energy sector to free up fiscal resources, Schröder added.

This would in turn provide support to vulnerable groups negatively affected by high energy prices.

In the long term, Schröder said steps should be taken to enhance energy security by diversifying the energy mix away from fossil fuels.

Countries should work towards low or zero carbon energy resources for electricity, heating and cooling; as well as promoting and investing in electric mobility vehicles and infrastructure.

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