Oil spike benefits: The cost of a barrel of oil has risen by $20 since the start of January. Sustained for 12 months, that would give about $620 billion of extra revenue for the world’s oil producers.
Some will be siphoned off in tax. Some may be used to fund more adventurous exploration projects. A more dangerous political climate may raise the risk premia for those that finance oil production. Added desire for security may increase overheads too. But most of the top line revenue growth will drop straight through to profits, leaving the oil rich a lot richer.
Before this year’s unrest, the price of the black stuff was already heading up. But it is also all too easy to see further hikes — it’s worth remembering that oil topped $140 a barrel as recently as July 2008. Another $20 could easily be added to the price of crude if civil strife prompts more active military intervention by western powers — through the imposition of a no-fly zone over Libya, for instance. But equally, a lack of military action might lead oil prices higher if UN/US reticence denies oil producers an armed security blanket that would comfort oil traders.
Though precise figures are hard to divine, sums measured in hundreds of billions of dollars are flowing into oil-rich nations. A lot of that cash will flow out again, most likely into developed world asset markets. US Treasuries, always one of the first places the newly-rich stash cash, will benefit from the support of buyers. Flows of petrodollars may partly explain the relative recent strength of equity and credit in the face of the West Asia’s traumas. Infrastructure, commercial property and glamorous trophy assets are also likely to be in demand.
New oil cash will not move all before it. Nor will the cash be applied evenly. But $620 billion, the proceeds of pumping 85 million barrels per day at a price elevated by $20 with no change in demand, is equivalent to about five per cent of the market value of the S&P 500. These are sizeable sums of money which will influence market pricings. Crucially, of course, the extra costs for oil consumers could amount to a quantitative tightening roughly equivalent to the quantitative easing some western central banks embarked on in the hope of spurring the economy forward. Expensive oil will drag growth, in the US, Europe and Asia, and that will knock on to asset prices. But the upside aspects to the oil price help leaven the investment story.
