190627 oil prices
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Surging crude oil prices are clearly a matter of joy for oil exporters around the world as it would boost government revenues leading to fiscal and external account strengths.

For GCC oil exporters, the surge in prices have come as a big relief at a time when these economies are starting to recover from an unprecedented slump dictated by the pandemic and prolonged low oil prices.

Undoubtedly, high oil prices are going to improve the fiscal situation in most of GCC with budget deficits turning to surpluses and current accounts once again bulging with petro dollars.

Clearly, the fiscal comfort gives GCC the opportunity to diversify their economies and undertake the much-needed structural reforms to help them withstand future gyrations in the oil market, and potential long-term impact of energy transition from hydrocarbons to renewables.

While oil exporters including GCC see relief in high oil prices, oil-importing nations are seeing dark clouds of inflation on the horizon.

Oil prices and inflation are connected in a cause-and-effect relationship. As oil prices climb, inflation tends to follow in the same direction. On the other hand, inflation tends to fall in tandem with falling oil prices. That’s the case because oil is a major input in the economy.

Energy price driven inflation will adversely impact economies around the world, including oil exporters and the burden on many low income economies could be debilitating.

Many of the emerging economies still reeling from Covid-related low growth environment will find the rising inflation adding to their fiscal burdens. While the general rise in prices will directly impact millions of people, it will also hamper the work of governments and central banks in devising appropriate fiscal and monetary policies.

When prices are on an upswing driven by energy prices, policy tools such as higher government spending and lower interest rates will add fuel to the inflationary pressures.

[Additionally, rising crude import bills will add to pressures on fiscal and external accounts resulting in unwarranted consequences such as currency depreciation, rise in external debt burden, rising bond yields and potential credit rating down grade inflicting further increase in cost of funds.]

For oil exporters too, a big surge in oil prices need not always be good news, as inflationary impact is universal, although stronger currencies will, to some extent, offset the imported inflation. However, a stronger currency also comes a deterrent to economic recovery of non-oil sectors such as tourism, travel and real estate as prices outstrip affordability.

Amid the diverging consequences of oil market dynamics, rising prices is a signal to producers to ease supply and importers to be less profligate with consumption.

Given the current state of global economy, it is important for both oil producers and consumers to find an equilibrium that support structural demand for oil, price stability over a longer period and sustained recovery of economies afflicted by Covid.