Expensive oil Threats Economy's Recovery
As the worst of the economic downturn seems to be over, optimism has returned to the global financial markets and the shipping industry as well.
Major indexes in world stock markets and the Baltic Dry Index have rebounded and day by day they are coasting to higher levels . But the recovery of world economy is still extremely fragile and one obstacle could be that of expensive oil.
During the last 10 days market exuberance over signs of easing global recession sent crude prices rallying above $68/bbl but a continued uptrend could threaten the nascent economic recovery that was inspiring it, according to the majority of analysts.
The main threat is that for the moment recovery could be pre-empted by commodity prices running ahead of the underlying fundamentals. That means, that all this anticipation of sustained recovery could be premature. If oil prices continue to climb, the prospect of sustained recovery could be nipped in the bud.
The majority of analysts underlines that at this point higher energy prices would further hurt the purchasing power of consumers who may have just resumed spending and would eat into the profits of companies currently struggling to keep production costs low. ?Consumers could get hurt in the long term if oil price rises above $90/bbl,? said Kwan of Mirae Securities.
The rally of oil prices is a new headache for the U.S government. U.S. Energy Secretary Steven Chu said on Monday that the jump in crude oil prices reflects an improving economy that will lead to higher petroleum demand, but warned additional oil cost hikes would slow the recovery.
"My guess is that the recent increases (in oil costs) are reflecting more signs that the economy is stabilizing and will increase in perhaps a year or so," said Chu, speaking at the Reuters Global Energy Summit in Washington. "The higher it goes in general ... it will impede the recovery."
"If the price begins to go considerably higher and start to really increase, I would say yes that higher OPEC oil output is needed," Chu said. He declined to speculate how much higher oil prices would have to go to require additional OPEC supplies.