Rising oil prices: good or bad news?

Rising oil prices: good or bad news?

The International Energy Agency has said that rapidly increasing oil prices may not be great news for the economy.

June 30, 2009 11:42 by Aarti Nagraj

The UAE’s economy may have already bottomed out and could expect to see a mild recovery in 2010, according to a report by Morgan Stanley. “The worst may indeed be behind us,” said Mohammed Jaber, author of the report. “The strength of the recovery will depend on the momentum for global growth and the timely resolution of imbalances in its domestic property and credit markets.”

Morgan Stanley said expected weakness in financial services, manufacturing and real estate would have an adverse effect on the non-oil sector, which was likely to remain flat this year.

But signs of improvement in the global economy, coupled with high oil prices and stabilization in domestic markets, are helping the country’s economy recover, Jaber said.

However, the rapidly rising oil prices may not be very good news; the International Energy Agency (IEA) has said that a quick oil price rise could upset economic recovery.

“We are watching carefully because if the price moves too fast compared to the economic recovery, it could derail the economic recovery. This is something we are very concerned with,” Nobuo Tanaka, the agency’s executive director said.

Oil prices have increased from $30.40 per barrel in December last year to roughly $70 a barrel today, although oil prices remain considerably lower than the record prices (almost $150 per barrel) seen last July.

The IEA has also slashed its forecast for world oil demand over the next five years, saying that by 2013, global demand will average 87.9 million barrels a day, 3.7 percent less than it expected in December 2008. The group predicts oil consumption will fall by 3 percent this year, the sharpest decline in 25 years. The agency has also said that global oil consumption could grow on average anywhere between 0.5 percent and 1.4 percent a year over the next five years, depending on economic growth.

During the last ten years, demand has grown by about 1.5 percent to 2 percent a year.