Are rising oil prices a good or bad thing?

For an optimistic observer oil back at $72 a barrel is a cause for celebration. It means the global economy must be recovering faster than expected, and that means stock market values should be rising, as indeed they are, confirming the reason for optimism.

Or does it really work that way? For a pessimist the sharp upturn in oil prices is seen as a harbinger of a second down leg for the global economy. After all it was last summer’s oil price spike that came just before the global financial crisis.

Oil revenue hike

Perhaps it depends where you are sitting. From the perspective of Abu Dhabi or Riyadh rising oil prices are an unalloyed joy, more revenue to renew the recent oil boom, and revive economies that have flagged badly since last summer.

But if you are an oil consumer nation the position is rather different. Oil prices function as a tax on consumers and business and also drive price inflation. Higher oil prices have always been bad news and a major contributor to recessionary periods, if not often the most obviously identifiable cause.

We now know that the world has entered its worst recession since the Second World War, and trade around the globe has crashed more quickly and by a higher percentage than in the Great Depression of the 1930s.

Fragile consumers

So is it not reasonable to conclude that higher oil prices are the very last thing that the global economy needs right now? And even for the oil producers they must also acknowledge that the economic recovery of their key clients is essential to their own long-term prosperity.

Oil producers would like to see prices that strike a balance between their own long-term investment plans, and the need to fund them, and the economic well being of their customers. Does that mean $50 or $80 a barrel? It depends to whom you talk.

However, speculation in the commodities market – probably largely with money supplied at low cost to the banks by governments for other purposes – is pushing up oil prices to unsustainable levels, which will prolong the already deep and deepening recession, and that is a bad thing for the global economy.