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Oil Price Spike—a Threat to the Global Economic Recovery

in International Business

Oil Price Spike—a Threat to the Global Economic Recovery

Analysts and policymakers are worried as oil price has gone up by 15% in 2012. The two main factors behind this are the unrest in the Middle East and the sanctions imposed against Iran.

Christine Lagarde, managing director of the International Monetary Fund, warned that a sudden spike in oil prices would have serious consequences for the global recovery, as it will increase the cost of doing business, manufacturing products and transporting goods across the globe.

Lagarde further added that crude prices could soar by between 20 to 30 per cent, if the West imposes an embargo on Iranian exports over concerns about its nuclear program.

The trade group for the global aviation industry warned airlines could run up losses of over $5 billion US this year if oil prices jump to $150 US a barrel because of Western tensions with Iran.

Ali al-Naimi, Saudi Arabia’s oil minister, has said that Saudi Arabic would step into the market to ease the concerns.

“My only mission is to convey to you that there is no supply shortage in the market,” the minister said. “We are ready and willing to put more oil on the market.”

Saudi Arabia is the world’s biggest producer of crude oil, currently outputting 9.9 million barrels per day. The minister said it could boost output to 12.5 million barrels per day if needed.

Iran, in retaliation for Western-led efforts to thwart its nuclear program, had threatened to block the Strait of Hormuz, a shipping checkpoint at the edge of Persian Gulf through which a fifth of world’s oil supplies pas. However, Kuwait’s ruler, Sheikh Sabah Al Ahmed Al Sabah, said that assurances are received from Iran that it will not take such a step.

High oil prices have become an issue in this year’s U.S. elections.

The higher the oil price gets, the more threatening it is to Barack Obama’s position in the next election. The five elections where gas prices may have had an impact were in 1976, when Gerald Ford lost to Jimmy Carter; in 1980, when Mr. Carter lost to Ronald Reagan; in 1992, when George H.W. Bush lost to Bill Clinton; in 2000, when Al Gore lost to George W. Bush; and in 2008, when John McCain lost to Obama.

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