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Politics & Current Affairs

Is 2012 the Year of Oil Shocks?

The cost of crude oil is already 16 percent higher than at the beginning of 2012. How much of a threat do rising oil prices pose to the gradual economic recovery? And what about Iran?

What’s the Latest Development?

The price of crude oil is already 16 percent higher now than it was at the beginning of the year. This is due mainly to a supply loss of one million barrels per day in recent months. A pipeline dispute in South Sudan and mechanical problems in the North Sea have taken 700,000 barrels per day off the market. 500,000 barrels of Iranian oil are also off the table because of the European embargo and a pricing dispute with China. Iran has threatened to close the Straight of Hormuz, where 20 percent of the world’s oil exports move to global markets. 

What’s the Big Idea?

Bracketing the scenario in which Iran closes the Straight of Hormuz, which economists say would halt the global economic recovery, the US will not be too badly affected by rising oil prices. “The standard rule is that a $10 increase in oil prices (which corresponds to a 25-cent rise in the price of gas) knocks around 0.2% off output in the first year and 0.5% in the second year.” That would slow, but not end, US economic growth, which is expected above two percent this year. The US economy is slowly becoming less energy dependent and plummeting natural gas prices have saved home-owners money during the (mild) winter. 

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