Oil Prices and Economic Growth



Recently, US oil prices have surged breaking out of a trading range they had been in for more than a year. At the same time, oil prices in other regions of the world have been more stable. Higher US oil prices could negatively impact US economic growth. Should the same trend take hold in other regions of the world, forecasts for global economic growth could also be tightened.

The price we see quoted for US oil is typically West Texas Intermediate or WTI. European and Middle Eastern crudes are typically priced off Brent Crude, which is produced in the North Sea. Historically, WTI has traded at a premium to, or in parity with, Brent. In late 2010, this longstanding relationship began to change, and since then, WTI has priced at a persistent (and sometimes significant) discount to Brent. More recently, changes to the transportation infrastructure for oil have started to take effect, helping to narrow this spread. As a result, for the first time since late 2010, WTI spot prices briefly surpassed those for Brent on July 19.

In the US, the increase in WTI prices is starting to have an impact at the pump, with gasoline prices beginning to rise. If the trend toward higher prices continues, global growth would likely be slower than most forecasters anticipate. It is estimated that every $10 rise in the price of a barrel of oil cuts global growth by around 0.2%-0.3%.

 

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