Oil prices remain expensive. We at Bear Stearns and Co. are concerned that the negative impact on the global economy could compound as the oil shock is increasingly viewed as prolonged rather than temporary. We still expect oil prices to fall sharply, but note in this piece the mounting costs from expensive oil. The longer oil stays expensive, the more these costs mount. We have seen that there are direct costs associated with transferring from a productive market-based environment to one controlled by OPEC. (With world oil demand at 27 billion barrels per year, every $5 worth of OPEC quota power costs the world US$136 billion per year. That's 0.5% of world gross domestic product, or 5% of world fixed investment.) In addition, the world is paying an increasing indirect cost as some central banks respond to oil-related inflation. We think expensive oil is a primary explanation for the very high cost of capital in many parts of the world. Now we expect a broadening of oil shock into new areas. Consider that many processes have buffered the oil price shock, smoothing its impact in anticipation of lower prices in the future. But we may be reaching an inflection point in which the costs of expensive oil will accumulate at a faster rate as the buffers shielding companies, investors, and consumers expire. As examples, we note:
David Malpass is chief international economist at Bear Stearns and Co. in New York. This column was distributed by BridgeNews but does not necessarily reflect the opinions of BridgeNews.