A gas nozzle is used to pump petrol at a station in New York February 22, 2011.
Credit: Reuters/Shannon Stapleton
BEIJING | Fri Feb 25, 2011 6:37am EST
BEIJING (Reuters) - No two oil shocks are alike, but the chances are that emerging economies could suffer a little less than the developed world if the latest price surge to 29-month highs is sustained.
Yet this would not be another illustration of how developing countries are decoupling from the West, for slower growth in the rich world would eventually rebound on emerging nations.
Only oil exporters are unambiguous winners -- for a while, at least -- from the redistribution of income set in motion by a spike in oil like the one this week, which was triggered by fears that unrest in Libya will disrupt supplies.
"Emerging markets will be hit, but they have deep enough pockets to still afford the cushion of subsidies," said Alicia Garcia-Herrero, chief emerging markets economist for Spanish bank BBVA.
That option is not open to most advanced economies, which have started to tighten fiscal policy to reduce budget deficits that ballooned during the worst economic crisis in 80 years.
"The last thing you want now is an oil shock," Hong Kong-based Garcia-Herrero said. "In the developed world, this additional shock will basically delay the recovery even further."
Among big emerging economies, she said only Mexico, Russia and, to a lesser extent, Brazil, stood to benefit from dearer oil. Latin America would, generally speaking, get off more lightly than Asia, Garcia-Herrero added.
TERMS OF TRADE
A rise in crude causes a deterioration in an oil-importing country's terms of trade: it has to pay more for a given amount of imports than it gets for the same volume of exports.
This eats into national income and translates into reduced consumption, narrower profit margins and higher inflation.
Central banks in advanced economies typically look past a rise in oil prices when setting monetary policy because, while it brings about a temporary change in the price level, it does not usually trigger an inflationary cycle across the economy.
That's why G3 central banks -- in the United States, the euro zone and Japan -- fret more about the impact that a worsening of the terms of trade has on growth than on inflation, said Richard Jerram, chief non-Japan Asia economist at Macquarie.
"But emerging economies tend to be more prone to second-round effects, especially when the domestic economy is pretty tight already and there's clearly a greater risk of a domestic price effect," Jerram said.
So whereas the Fed would positively welcome a modest inflationary jolt, central bankers in emerging economies already struggling to cap price pressures are in for sleepless nights.
"G3 is worried about the hit to growth and emerging Asia is worried about the hit to inflation because it's recovered already. So you suffer, but you suffer in a different way," Jerram said.
We are going to pay more for everything in the US because we have no comprehensive energy policy other than Obama’s insistence we have to drop everything to go for alternative energy sources and exotic products such as the electric car. We are beset by problems in housing, the economy and health care. Obama is turning out to be far worse than Carter. Obama is already is setting his place as the worst president ever. The ironic part of this is his administration is hurting the very people the Dems say they champion – the poor and those with no skills.
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