Euler Hermes Economic Research
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Editorial
A little reminder of the 1970s
‘Oil shock’ – the very phrase seems a little old-fashioned, or at least ‘retro’, so long has it been since we last experienced one. But hearing it again now, thirty years on, the old memories come flooding back – the global redistribution of wealth, the ineffectual monetary policies, the drive to save energy – all brought back to mind by those two words, themselves a sort of Proustian reminder, redolent of oil and the 1970s. We had forgotten, first of all, that an oil shock is above all a violent redistribution of the world’s wealth, from those who use oil to those who produce it. To give an idea of the scale of this, the rise from $73 a barrel last year to an average of a little over $120 a barrel this year corresponds to the sudden transfer of $620 billion from the major net importing countries to the major oil exporting countries. This calculation, based on 2008 alone, needs to be doubled if we are to gauge the latent shock that has been developing from2003 onwards. Overall, it works out to around 2.4% of world GDP, which, since 2003, has changed hands simply because of the rise in the price of oil. For the record, the oil shocks of 1973 to 1980 represented a transfer of 1.9% of world GDP. Another thing we had forgotten is that the initial shock always gives rise to multiple international macroeconomic shocks.
First, the general equilibrium in current account balances obviously gets called into question. However, the OECD countries are not necessarily the ones that suffer the most damaging effects: wealth transfers also occur between developing countries, and to an even greater extent today than thirty years ago. Among the ten biggest net oil importers, we find China, India and Taiwan. China, the third biggest net importer, is seeing its much-heralded external surplus trimmed by $60 bn, or 1.4% of its GDP. Naturally, the question of the dollar pegging of currencies of some producer countries, for example Abu Dhabi, is equally called into question.
Second, inflation is revived. Even if the shock is not quite on the same scale on opposite sides of the Atlantic, the euro zone being partially shielded by the high level of the euro, the effects are still very similar on consumer prices, up by 4% in the euro zone in June, and by 5% in the US in the same month. Undergoing, thus, a fairly similar shock, the consequences are identical: in the US and the euro zone alike, household consumption is floundering at its lowest rate of growth seen for a decade. This sudden shortfall in domestic demand is what is sending growth to around zero – in the US, in France or in Italy alike – in this second half of 2008.
Third, serious uncertainty surrounds the state of business profitability: the supply shocks of the 1970s gave way to several years during which production was restructured across the world, notably in industry. Still, this second chapter of the 2008 shock has not yet been written. And, in the face of all these more or less confirmed outcomes, there again arises the issue of energy independence: thirty years after the first campaigns to save energy, the landscape of oil dependency is extremely diverse, notably in terms of the choices made to either pursue or forego nuclear energy.
France, which has taken the former route, has assured itself 50% self-sufficiency in energy. Among its neighbours, the figure is only 18% in the case of Italy and less than 40% for Germany. These great differences could well determine a large part of the economic future of each of these economies.
Karine Berger
Source: Euler Hermes Economic Outlook, Summer 2008
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