IMF Sees Possible Oil-Price Shock From Middle East Unrest

A potential surge in oil prices caused by unrest in the Middle East and North Africa may cut global growth by as much as 0.5 percentage point next year, the International Monetary Fund said in its World Economic Outlook.

In the worst case, a disruption in the Middle East would push oil to $150 a barrel, the Washington-based lending agency said in its October World Economic Outlook, leading to “adverse effects on confidence, with capital retreating to safe havens and a persistent decline in equity prices.”

The IMF forecast that world gross domestic product will increase by 3.6 percent in 2014, up from 2.9 percent this year, mainly driven by an improving U.S. economy. Average global oil prices will decline slightly to an average of $101.40 a barrel as emerging market demand slows.

A chemical attack in Syria on Aug. 21 caused Brent crude prices to jump 6.2 percent to a high of $116.61 a barrel on Aug. 28 as the U.S. and its allies threatened to respond with missile attacks against the government of Syrian President Bashar al-Assad. Syria’s agreement to dispose of its chemical weapons stockpiles helped ease tension and the rising Brent price, which settled at $109.68 a barrel yesterday.

The IMF forecast three oil-surge scenarios. In the first, a short-lived disruption would cause oil to jump as much as 20 percent for a few weeks, with only a small effect on growth.

“A larger production disruption assumes that the Syria conflict spills over, for example by halting Iraqi oil exports,” the IMF said. Syria borders Iraq, which produced 3.1 million barrels of oil a day in June, according to U.S. Energy Information Administration data.

Global Growth

In that case oil could rise to $150 for two quarters, but the effect on global growth would only be as much as 0.13 percentage point, assuming “that the global oil market still functions efficiently via higher prices.”

The worst-case scenario of a 0.5 percentage point hit to growth would occur if an increase to $150 prompts investors to move their money away from riskier assets such as commodities and equities.

The IMF also estimated that the boom in U.S. energy production would have a “modest impact” on the nation’s growth, with real GDP rising by about 1.2 percent at the end of 13 years. Growth will rise as lower energy costs prompt companies to increase capital expenditures and hiring.

“The share of energy in the economy remains quite small even after factoring in the additional production,” the IMF said in its report.

The IMF based its U.S. projections on the Energy Information Adminstration’s forecast for tight oil production, which shows output increasing until 2020 before falling off during the next two decades.

U.S. oil production reached a 23-year high of 7.83 million barrels a day in the week of Sept. 13. Exploitation of shale basins using hydraulic fracturing and horizontal drilling techniques helped the U.S. meet 87 percent of its energy needs in the first six months of 2013, according to EIA data.

To contact the reporter on this story: Edward Welsch in Calgary at ewelsch1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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