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EPHEMERAL ENERGY: World economy relying on unstable energy boost

For now at least, lower energy prices may indeed be a lifeline for a nervous world economy but it's a lonely positive and far from a stable one.

July 9, 2012 4:24 by

As storm clouds gather over the global economy again at midyear, lower energy prices are one of the few flickering rays of light on the horizon – even if they too look increasingly ephemeral.


Economic activity and business and household confidence around the globe has tailed off badly again in the second quarter. The headwinds remain fierce, from imponderables related to the latest wave of the euro crisis and European banks’ retrenchment to U.S. fiscal uncertainty and a spluttering of growth engines in the big emerging economies.


Friday’s lukewarm U.S. employment report for June and nagging doubts about the efficacy of latest measures to insulate the ailing euro zone have darkened the skies yet again.


The International Monetary Fund last week flagged an imminent cut to its 3.5 percent 2012 global growth forecast, which is likely to at least reverse its modest 0.2 percentage point April upgrade.


And major central banks in the United States, the euro zone, China and Britain have all eased monetary policy again in recent weeks to ward off the growing chill – positive moves in and of themselves but also a sign of concern about the deteriorating outlook.


One of the few remaining positives over the second quarter – or at least for the majority of countries that import oil – has been an almost $30 per barrel plunge in benchmark crude prices in just three months.


As the global slowdown pulled the demand rug from under the energy markets, the traditional stabilising effects of oil returned to the fray. So much so that year-on-year drop in oil prices is almost a whopping 20 percent.


“The drop in oil is clearly one of the few hopes, even though everything is contingent on it being sustained and there are so many risks to that. Even then, you have to wonder whether any benefits just get swamped by relentless deleveraging,” said Neil MacKinnon, economist at Russian bank VTB Capital.




Apart from putting more money in the pockets of consumers and firms by lowering fuel bills, and eventually the cost of products with high energy inputs, the drop in oil prices should have a significant impact on consumer inflation rates that are already falling far below the danger rates seen last year.


For central banks keen to ease monetary and financial conditions still further to fill in the hole left by retrenching banks, this amounts to a green light for even further money printing and interest rate cuts.

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