| WEF Global Risk Report - Oil above $80 per barrel?
February 1, 2006
The World Economic Forum (WEF) released its annual Global Risk Report, which listed a half dozen potential risks to the world economy from a bird flu pandemic to the risk of global warming.
Of most interest was their assessment that there is a more than 20% chance that oil would spike above $80 per barrel in within the next 12 months. The estimated cost to the global GDP would range between $250 billion to $1 trillion.
What it Means:
Although the thought of a 20% chance of this price shock is alarming, there is also an 80% chance that the price will stay in the $70’s or lower. However, the potential for such a shock comes from many sources:
- Continued political instability in the Middle East,
- Possible trade sanctions against Iran,
- Continued violence in Nigeria,
- Increased demand from China and India,
- Increased tariffs from Nicaragua,
- A speculative run on the price due to fears of all the above.
The cost of an oil price spike will be incurred mostly on oil consuming countries, while the benefits will go to the oil producing ones. However, all countries will suffer from a decline in business confidence, and higher inflation which may contribute to a global economic slowdown.
In a worst case scenario, if oil prices went over $100 per barrel for a long enough time, the costs would be similar to the oil price shocks of the 1970s, which led to recession, and social unrest in oil consuming countries.
Action Steps:
There are three action steps you can take.
- Add mutual funds to your portfolio that include stocks from oil and natural gas companies.
- Add mutual funds that include any other stocks from oil producing countries.
- Reduce your exposure to high oil prices by buying high mileage vehicles, reducing your commute time and downsizing to reduce your energy usage at home.
Source: World Economic Forum
|
