The oil prices increases again take the lead on the economics news front. Questions arises about its probably impact on global economy. So far, successive oil prices increases have not restricted global economic growth .This leads us to the question, why it has been so ?. If we understand the answer to this question, we will able to anticipate its effects on global economy or to choose correctly the proper forecast.-
The recent economic forecast of the IMF, set the global economic growth for the year 2006 , at the 4,9% level, which is quite optimistic given the scenario of increasing shortage in oil supply . Others prestigious economist expectations, are not so positive and foresee a risk of global slowdown. Both represent alternative scenarios. Which one you prefer ,it will depend of your own risk preferences and information available. If you are risk averse with minimal information ,you will decide on the basis of the second approach, if you are risk taker with a lot of information, you will decide based on the first approach. However, I think the issue is not about how well informed we are, but how do we understand the fundamentals of the new global economy?. Concerning this topics let me mention some key elements:
a.- The industrial economics, was capital intensive , heavily concentrated on given endowment of capital resources, but with oil intensive production technology .Any increases in oil prices were not matched by capital prices decreases, such that relative prices adjustment ,avoided inflationary pressures. Capital prices did not fall, because the demand from it was steadily increasing, to matching the requirements of emerging economies to sustain their own economic growth, or the industrial economy to keep the pace of their own economic growth.. On the other hand, there was not labor cost mobility either, compensating for such price restriction, such as to allow settle down productive process in those places with lower labor cost. Any oil prices increases , meant industrial economic recession, because lack of flexible cost structure. The transmission mechanism between those economies, both productive and financial ones , would ensure that the recession dynamic were spread out all over industrial economies , so the rest of the world.-.
b.- Global economy is less oil dependent, because of higher factor mobility, because it uses production technology based on alternatives energy sources, and heavily concentrated on knowledge endowment, so that relative prices adjustment either avoid or mitigate inflationary pressures .In this scenario ,any oil prices increases , means another ´s input lower relative prices. and inflationary pressures are neutralized. In fact inflation rates in advanced economies in the year 2004 and 2005 was not much higher than usual, and the forecast for the year 2006 and 2007 are 2,3% and 2,1% respectively, even though the expectations are for higher oil prices, at least up to the point it fit itself to its long run trend.
c.- Information technology applied to the management and productive process in every organization , have allowed productivity gains counterbalancing the impact of higher oil prices ,and keeping inflationary pressures in check. The higher supply of both capital (recycling of capital from oil exporting countries),and lower cost labor supply, ( China as the global producer),have reinforced such counterbalancing effect.-
d.- The huge increase in revenues for oil exporting countries should go somewhere. So, It could go to speculative funds, investment funds ,or portfolio diversification purchases. Wherever it goes, allows higher availability of funds for growth. Sure those economies which are not receiving any of these new additional financial resources will have more troubles to adapt themselves to the new scenario, But those ones who get an increasing fraction of it, will have the resources to support growth .-
Under uncertain conditions, These four factors will jointly explain the future developments concerning global economy, in the higher oil prices schema.
So, it seems that global economy has its own economic protections forces to keep on with a healthy economics growth rates despites oil prices increases. The key question then ,is what happen with the economies which add up the global economy and what level of interdependence exist between them?. It will depend on either how close or how far those economies are from the characteristic of global economy, and your perception of interdependence, Which forecast you should follow .It will also all depend on each business scale ,whether it is globally or locally based. .If you have business on a global scale, the first forecast will help you better. But if you have business on a local scale, the second forecast will help you more to understand what it is next.A different matter is the degree of conection between global economes club , and each of its members.-