A spike in the oil price has preceded every big meltdown in the world economy since the 1970s. The 2011-2014 spell of high prices delayed global recovery from the financial crisis. So a rise of 45 per cent in benchmark prices within five months would generally be cause for alarm.
But oil’s steady climb since last December — fuelled by Opec production cuts, conflict in Libya and US sanctions against Venezuela and Iran — has barely troubled the markets: instead, global stocks have rallied as recession fears waned.
Last week, Donald Trump’s threat to block Iran’s remaining exports briefly helped send the price of Brent crude above $75 a barrel for the first time since last October, although it slid back on Friday after the US president claimed he had extracted promises from Saudi Arabia and other producers to increase supplies.
But despite last week’s upheaval, US equities hit new highs and currency markets were calm.
There are two main explanations for the apparent lack of concern, say economists. First, some argue, recent price gains have been driven as much by a recovery in global demand for oil as by disruptions to supply. If this is the case, oil consuming economies should be strong enough to cope with higher prices.
“Consumers can take a modest burden in their stride. Labour markets are in good shape on both sides of the Atlantic. Credit conditions remain favourable,” said Kallum Pickering, economist at Berenberg.
Secondly, many energy economists say the transformation of the oil market since 2010, with falling production costs and rapid growth of US shale production, mean future supply shocks will be smaller and more shortlived.
“[There] would have to be a very big shock . . . a long and sustained cutback from major producers, to see a [price] spike of the sort we’ve seen in the past,” said Nick Butler, visiting professor at King’s College London.
He argued that cuts by exporters such as Iran and Venezuela could rapidly be replaced by US shale oil, or by Russia or Opec states that have struggled to diversify their economies and are desperate to raise revenue.
As recently as five years ago, taking a large producer such as Venezuela out of the market would have pushed prices above $100, but now the impact was limited, Prof Butler said. If oil prices settled around $70 a barrel, they would in real terms be 50 per cent below their level five years ago and barely changed from 40 years ago, he added.
But some analysts say that an oil shock, even if less damaging than in the past, could pose a threat to the fragile global expansion.
Jason Bordoff, a professor at Columbia University who advised the Obama administration on energy, said prices could be higher and more volatile in the longer term. US shale production would not grow fast enough to absorb new demand indefinitely and shale companies could not be relied on to crank up production whenever prices rose, he said.
They needed six to 12 months to scale up operations, and as established oil groups took over from smaller producers, they would be more able to absorb temporary price swings and less inclined to carry the costs of scaling up and down.
Analysts at Oxford Economics, the consultancy, argue there is a risk of a more immediate, if shortlived, price rise, saying it would take only “one more shock to supply”, such as unrest in Nigeria’s Delta region, to push prices above $100 a barrel this year.
They estimate this would leave global growth 0.6 per cent lower by the end of 2020 and drive the sharpest increase in global inflation since 2011.
However, both the overall impact, and the pattern of winners and losers from a change in the oil price, has changed significantly in the past decade.
Oil producers, whose public finances were strained following the 2014 drop in prices, might now be more likely to spend extra budget revenues, cushioning the impact of price swings on global demand.
The eurozone is likely to be less vulnerable. Consumption and production have become less oil intensive, with growth increasingly driven by services, and labour markets are in better shape. The European Central Bank said last September that a stable price of $75 a barrel would have little effect on real incomes or consumption.
The biggest losers would be oil-importing emerging economies. With oil at $100, both Turkey and Argentina would lose close to 1 per cent of GDP, according to Oxford Economics.
The hit to growth in China and India would be similar, it said. An oil-induced slowdown in these countries would be far more damaging now than in the past, since they are more integrated into the global economy than previously.
But the most significant change in the past decade has been in the link between oil prices and US growth.
US interests used to be clear cut: a rise in gasoline prices rapidly hit GDP through its effect on consumers.
The 2014 oil slump could have been expected to add about 1 percentage point to output growth. But research published by the Brookings Institution showed the net stimulus was close to zero, because gains for consumers were offset by a dramatic decline in investment by the oil sector.
Gasoline prices remain a big issue in an election year, but with the US set to become a net exporter, politicians must now weigh the interests of consumers against those of oil producers and their workers.
“The political costs are higher than the economic costs,” said Andreas Economou, at the Oxford Institute for Energy Studies, noting that while the interests of oil consuming and oil producing [US] states were diverging, “consumers dominate in the swing states that any candidate would want to secure”.
“The reality is that a higher oil price is not necessarily bad . . . if your worry is the health of the US economy rather than consumers,” Prof Bordoff said. “That reality is not fully appreciated yet in Washington.”