from Follow the Money

Unpleasant oil math

May 24, 2008

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There has been a lot of speculation this week about the role speculation has played in the recent run-up in oil prices.

There is little doubt, though, about the short-term economic impact of higher oil prices: an enormous transfer of wealth from the oil-importing economies to the oil-exporting economies.

Back in November, I calculated that a $10 a barrel increase in the price of oil would, absent any increase in domestic spending or domestic investment in the oil-exporting economies:

Increase the US trade deficit by about $50b over the course of the year.

Lead to a $46b (euro 31b) deterioration in the EU-25 trade balance. The EU-25 imports a bit less oil than the US (12.6 mbd v 13.7 mbd) even though it produces less oil than the US and has a somewhat larger economy.

And conversely, each $10 increase in the barrel of oil means:

An additional $57b for the GCC states (Saudi Arabia, Abu Dhabi, Dubai and the other emirates, Kuwait, Qatar, Bahrain and Oman).

An additional $25-26b for Russia.

An additional $10b for the Iranian government.

An additional $9.5 or so for the socially conscious burghers of Norway to stash away in their already quite substantial sovereign wealth fund.

An additional $8b or so for Venezuela.

I forgot to include China the first time around. That is a rather important oversight. If China imports 4 mbd in 2008, a $10b rise in the price of oil would increase China’s annual oil import bill by about $15b.

Oil -- sweet light crude, that is -- averaged about $70 a barrel in 2007. The IMF WEO assumes it will average around $95 a barrel in 2008. And if it doesn’t fall from its current levels, it now looks set to average at least $115 a barrel.

The resulting math isn’t hard.

One final note -- I’ll be traveling for the first part of next week. Rachel Ziemba and Christian Menegatti -- my former reserve and SWF tracking colleagues at RGEMonitor -- will be guest-blogging here.

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