Crude oil prices in the U.S. and around the world are hitting highs last seen in September amid the ongoing crisis in Iraq as terrorist group Islamic State in Iraq and Syria (ISIS) seizes cities and oil refineries in their march toward Baghdad.
Here are seven ways that rising oil prices will impact global economies:
1. Growth in the euro zone, dragged down by France and Germany, is grinding to its slowest pace in six months, according to a June survey released Monday. About 5,000 companies across the currency area and in the manufacturing and services sectors reported higher input prices and specifically higher oil prices as “a key cause of rising costs,” according to survey compiler Markit. Apparently, oil prices are not yet high enough to weigh down manufacturing and service sectors in the U.S. and China, where Markit surveys found conditions are reviving despite fears of a slowdown.
2. India is dependent on oil imports for more than three-fourths of its needs, and about 13 percent of its imports come from Iraq. That means Asia’s third-largest economy, whose stock market has performed among the best in the world this year, could see an economic crisis unfold if oil prices don’t fall again. Since India subsidizes many fuels like diesel and kerosene, aiming to shield the poor from price fluctuations, the government must compensate losses to fuel retailers. Every dollar increase in the oil price raises the subsidy burden by about $997 million, an Indian oil official told the Wall Street Journal.
3. The price of gasoline in the U.S. is closely pegged to the international price of oil. In general, a $10 increase in the oil price will cause a 25 cent rise in gas prices. (This is known as the Hamilton-to-a-Quarter Rule, a $10 bill with Alexander Hamilton’s face to a quarter.) This rule only roughly estimates the national average price of gasoline, and prices always vary by region. For example, gas prices soared past $4 a gallon in California on Sunday, but are around $3.80 in Michigan.
4. Another handy rule: a 1 penny shift in U.S. gas prices generally leads to a $1 billion increase in American household energy consumption. If gas prices rise by a dime, that’s a $10 billion increase in household energy consumption. Analysts have said gas prices could rise 5 cents to 10 cents this summer if the turmoil in Iraq continues.
5. Since energy, particularly oil, is about 10 percent of the consumer price index, a 10 percent increase in energy prices increases inflation by an additional 1 percent (added to an economy’s inflation from other factors), according to Deutsche Bank Chief U.S. Economist Joseph LaVorgna.
6. Rising oil prices also hits gross domestic product. In general, a $10 increase in the price of oil cuts 0.2 percent to 0.3 percent from GDP. That means, so far the uptick in oil prices is causing about a 0.15 percent decline in global GDP. The International Monetary Fund estimated in January that global GDP would grow at about 3.7 percent this year.
7. The global economic recovery will be weak and unsustainable as long as oil prices remain above $100 per barrel, according to the macroeconomic think tank Capital Economics. Julian Jessop, head of commodities research, said June 20 that if the unrest in Iraq drags on like the civil war in Syria has, he expects even with Western oil reserves and increased output from Saudi Arabia adding to global oil supply, prices could settle at $120 per barrel “for an extended period.”
“This would be the level at which global growth has faltered in the past,” he added.