Oil

The FT’s Martin Wolf has said almost everything that needs to be said about the global economic effects of the 2014 oil shock, but one additional point is worth emphasising. This is the fact that the US Federal Reserve and the European Central Bank view the consequences of the oil shock entirely differently. The markets have, of course, already been acting on this assumption, but the extent of the gulf between the world’s two leading central banks on this issue has been underlined by Mario Draghi’s dovish speech last month, and particularly by the Fed vice-chairman Stanley Fischer in a somewhat hawkish interview with The Wall Street Journal.

In perhaps his most significant statement since becoming vice-chairman in May, Mr Fischer made it clear that the period of low inflation due to falling oil prices will not deter the Fed from starting to raise interest rates next year. Furthermore, he suggested that the Fed might soon drop the assurance that it would not raise rates for a “considerable time”, replacing it with alternative language that is less constraining on its future actions.

It now seems likely that this language change could happen at the next Federal Open Market Committee meeting on December 16 and 17. By contrast, Mr Draghi and his supporters at the ECB clearly view the oil shock as a reason to shift policy in a more expansionary direction – if not at Thursday’s policy meeting, then sometime fairly soon. Read more

Each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices. Sometimes (eg in the 1970s and in 1990), the surge in oil prices has been due to supply restrictions, triggered by OPEC or by war in the Middle East. Read more

The global financial markets have been remarkably stable this week, considering the dramatic events which have been taking place in the Middle East. Whether this complacency is about to be shattered remains to be seen. After all, there are plenty of reasons for real concern when the world’s largest oil producing region shows signs of mounting political instability, as Nouriel Roubini emphasises in the FT today. But there are also grounds for hoping that the Egyptian crisis might be resolved without causing disruption in the neighbouring Gulf states which contain the vast majority of the region’s oil supplies.

And meanwhile optimism has been boosted by this week’s business survey data, which show that the world economy is in increasingly robust condition as 2011 begins. The markets seem disposed to see the glass as half full for the time being. Read more