The Organization for Economic Co-operation and Development (OECD), which promotes policies that improve the economic and social well-being of people around the world, has taken the speculation out of the question about the relationship between rising oil prices, economic growth, and inflation.

 

The OECD analyzed the facts based on historic trends, and it has found that there is only a modest correlation between oil prices and economic growth. Further, there is also only a modest relationship between overall price inflation and higher oil prices.

 

This is the story you won’t read in your local newspaper or hear on your television, because it isn’t sensational, and because it suggests that there is little about which to worry.

 

OECD Study about Oil Prices

Earlier this month, the OECD published a treatise about “The Effects of Oil Price Hikes on Economic Activity and Inflation.” Here are the highlights of this study.

 

Background

·         The OECD noted that commodity prices have risen considerably since mid-2010. Oil prices have risen by about 40%, with the bulk of the increase having taken place since December 2010. Further, prices of food have risen faster than average, since about one-third of the cost of grain production is related to energy costs.

 

·         Strengthening demand has accounted for most of the oil price hikes early in the recovery cycle, until geopolitical tensions erupted in North Africa and the Middle East in early 2011. Emerging-market economies have been particularly heavy users of oil during the economic recovery. Further, the depreciation of the U.S. dollar has helped fuel oil price hikes.

With increasingly unstable political conditions in some of the oil-producing economies, oil prices have risen sharply, despite Saudi Arabia’s pledge to make up for any oil shortfall from Libya and perhaps other countries.

 

OECD Estimates of Economic Growth & Inflation Impact

·         The OECD estimates that a $10 increase in the price of oil could reduce economic activity in developed countries by two-tenths of one percent in the second year after the price hike. In short, there is little to no measurable impact in the first year; economic activity is slow to react to oil price swings.

 

·         Inflation could rise by roughly two-tenths of one percent in the first year after a $10 rise in oil prices. Further, inflation could rise by another one-tenth of one percent in the second year following oil price hikes.

 

Conclusions

If the $25 increase in the price of oil since the Tunisian uprising were to be sustained, economic activity could be affected by 0.5% by 2012, and inflation could be 0.75% higher later this year. It is important to note that the OECD forecast is based on a sustained higher oil price. Forecasters are fiercely divided on the future direction of oil prices, with no middle ground.

 

In short, it appears that despite the importance of petroleum and petroleum by-products in the global economy, oil prices do not have the dramatic impact on economic growth and inflation that some have suggested.

 

Our advice: focus on the diamond and jewelry market, and let the economists fight about oil prices.