High oil prices pose a debacle to global economic recovery, particularly in emerging markets

Since oil prices exceeded $70 per barrel earlier this year, analysts, economists, and central banks have been fretting about whether higher crude prices could disrupt the momentum in global economic recovery from the pandemic. 

Most experts argue that inflationary pressure is no doubt rising in developing economies, which are more sensitive than developed markets to rising oil prices. Fuel and food prices generally account for more consumer spending in emerging economies, so they hurt them more than mature markets when oil prices rise. Inflation concerns have also started to emerge in the United States and other developed countries. 

Oil prices have not yet reached the point where they could derail the economic rebound in developed markets, economists and analysts told The Wall Street Journal last week. 

Globally, the cost of oil as a share of GDP, also known as the oil burden, will rise this year because of the higher oil prices, but it will still stay below long-term averages, according to estimates from Morgan Stanley cited by the Journal.

In 2021, the oil burden is set to increase to 2.8 percent of the world’s GDP if prices average $75 a barrel. But even this higher burden than in previous years would be lower than the long-term average of 3.2 percent, the investment bank says.

Oil would have to average $10 a barrel higher—$85—in order for the so-called oil burden to reach the long-term average, the Journal quoted a Morgan Stanley report from earlier this year.  

Current economic projections for developed economies show that this year’s oil price rally will not be a significant bump to the post-pandemic growth recovery.  Rising crude prices are expected to have a small effect on the overall economic growth and outlook on developed economies than they did a few decades ago. But higher prices are certainly challenging to developing economies, especially those heavily dependent on oil imports such as India. Inflationary pressures are stronger there, and analysts see $80 oil as the red line beyond which oil demand destruction begins. 

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