IMF Analyst Sees Global Slowdown Biggest Oil Worry

By John M. Biers

A big drop in oil prices due to a global economic slowdown constitutes a bigger worry than the relatively high price floor for oil that has prevailed recently period, an International Monetary Fund analyst said in an interview this week.

Oil prices have dropped roughly 20% in recent weeks amid weak jobs data and other economic indicators that have renewed fears of a global slowdown, yet remain high by historical standards, lingering around or above $100 a barrel Brent since January 2011.

In remarks that provided a view of how the IMF sees the oil market, Prakash Loungani said the global economy has adapted to a relatively high oil price floor as long as it isn’t caused by an unexpected supply disruption. But Mr. Loungani said the agency now fears a big drop in prices because it would likely be accompanied by a major global economic slowdown.

“The worry is that the economies are looking soft, both the U.S. and major emerging economies,” said Mr. Loungani, an advisor in the research department of the IMF who handles commodities research.

“We are very worried about the state of the world economy,” Mr. Loungani said in a telephone interview.

Thursday, ICE July North Sea Brent crude was 1.2%, or $1.23, higher at $101.87 a barrel. Light, sweet crude oil for July delivery was up 1.6%, or $1.34 higher, at $86.38 a barrel on the New York Mercantile Exchange.

Mr. Loungani said a relatively high oil price isn’t in itself a huge concern for the economy. The influential Saudi oil minister, Ali al-Naimi, said recently he wants oil prices around $100 a barrel. Other countries in the Organization of Petroleum Exporting Countries now also look for triple-digit oil prices, leaving the $22-$28 a barrel price band once favored by the cartel as a distant memory.

Mr. Loungani pointed to IMF research that has shown how the world has adapted to relatively high oil prices due to a number of factors. For one, much of the reason for higher oil prices rests on rising demand in emerging economies; in that case, the benefits of strong growth outweigh the negatives of higher oil prices.

Other mitigating factors to high prices include more sophisticated central bank policies that guard against oil-related inflation growth; greater efficiency in the use of energy in the economy; and greater diversification in energy supplies.

“The trends are in the direction of reduced impact” on the economy from higher oil prices, Mr. Loungani said. “The structure of the economy has adjusted.”

However, Mr. Loungani said the global economy can still be harmed by sudden price spikes if they are caused by unexpected supply disruptions, because “the economy still doesn’t have the means to handle that in the short-term.”

Some economists have highlighted the role that higher oil prices played in the global 2007-2008 slowdown related to lower disposable income. At the time, the dominant explanation for the slowdown concerned the bursting of the U.S. housing bubble and the ensuing financial crisis.

Mr. Loungani said he has been persuaded that “oil prices may have played a role” in that slowdown, but he said the current weakness relates more to lingering financial weakness and the ongoing euro zone crisis.

Write to John Biers at

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