Has the risk of inflation caused by higher oil prices subsided?
The overall picture is that inflation is under upward pressure in most countries. However, the strength of that pressure varies from country to country. China is an exception to this. Inflation there is very low as a result of the slump in the domestic economy. This is significant for the rest of the world insofar as these countries usually import a great deal from China. Low inflation in China therefore also pushes down inflation somewhat in other countries. More important, however, are:
- The extent to which growth in the country in question is above, at or below potential growth. This has a fairly significant influence on the extent to which secondary effects occur: the extent to which higher prices for a particular product lead to higher prices for other products and/or trigger higher wage increases.
- The trend in energy prices. This mainly concerns the prices of oil, diesel, petrol and gas. Price rises in these areas can also easily lead to secondary effects. An escalation of the war in the Middle East could lead to a rapid rise in energy prices.
At present, however, the opposite is the case. Trump had originally indicated that he would attack Iran after the mid-term elections. He has the opportunity to do so at least until early January, as the outgoing Congress remains in session until then. On 3 January, however, the new Congress takes office. This will almost certainly block the funding for a new attack unless Iran provides a clear pretext for one. It is, however, almost certain that Iran will not do this and will, in fact, indicate beforehand that it wishes to resolve the matter through negotiations. If this means that the US does not attack Iran until 3 January, then Tehran can count on the new Congress to prevent such an attack thereafter.
The question remains as to how Trump will handle this. He is well aware that launching an attack after 3 January will be very difficult and that he would therefore be better off doing so before then. Given that Iran is not giving an inch on the issue of nuclear weapons, the temptation for Trump to strike before then is therefore great. He is, however, faced with the major problem that the American public is strongly opposed to this. An attack on Iran could therefore leave him politically isolated. That is why we do not expect Trump to take this course of action any time soon.
The conclusion, for the time being, is therefore that the Middle East is likely to remain relatively calm for the time being. The question then is whether this means that energy prices will fall back to much lower levels. After all, the supply of oil will then at least return to pre-war levels and probably exceed them. However:
- Stocks are currently very low. These will first need to be replenished.
- The rate of growth in the global economy largely determines the level of demand. As things stand, growth is set to remain fairly high, particularly if oil prices fall.
- Ukraine and Iran have caused considerable damage to many refineries. This cannot be repaired overnight. This means that, even if there is sufficient oil, shortages may persist for various products, such as diesel. For the time being, it also appears that there will be a gas shortage.
Our final conclusion is that the oil price may well remain under downward pressure for a while yet, but that, on balance, we do not expect it to slump to low levels. Moreover, it would only take the slightest development for the price to rise again.
