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Oil will not derail recovery says World Bank

Washington, March 1, 2011

A sustained period of higher oil prices would significantly affect developing economies but is unlikely to derail their strong recovery since the financial crisis, a senior World bank official said on Monday.

Andrew Burns, the World Bank's manager of global economics, said a surge in the oil price could dent economic growth in developing countries by somewhere between 0.2 and 0.4 percentage points if it remained high for a year or longer.

'If prices remain high for a significant period of time, say a year, then you're looking at an impact on GDP that is significant and measurable, but which is unlikely to be large enough to derail the recovery in the growth we're observing in developing countries,' Burns told Reuters in an interview.

The poverty-fighting institution is closely monitoring the spike in oil prices because more expensive fuel, alongside current high food prices, would push more people into extreme poverty.

Burns said the rise in global oil prices by $15 to $20 a barrel in recent months was a concern but was not a 'calamitous event' for developing economies whose economies are growing strongly at around 6 per cent or more, as opposed to low growth in industrialised nations.

Brent crude prices surged to 2-1/2 year peaks last week after uprisings in the Middle East and Africa spread to Libya. The price fell on Monday by 34 cents to settle at $111.80 a barrel in volatile trading as pressure grew for Libyan leader Muammar Gaddafi to step down.

'Assuming that the situation in the Middle East and North Africa doesn't escalate, then we should see these prices return to levels we were looking at in December,' Burns said.

'In that scenario it should have a relatively small impact.'

However, if political uncertainty in the Middle East drags on developing countries will start to feel the impact of costlier fuel, Burns added.

He said poorer countries running large current account deficits will be hardest hit by a rise in fuel prices because they were unable to absorb the increased costs and would have to cut spending elsewhere to make up for the losses.

The World Bank already warned last month that an estimated 44 million people were pushed into extreme poverty since last June as food price costs have risen close to 2008 levels, when oil prices had also skyrocketed to $147.27 a barrel.

But Burns said oil capacity was at record lows in 2008 and currently there was sufficient capacity in the United States, Europe and other countries unaffected by the turmoil in the Middle East and North Africa.

'Our sense is that if the uncertainty that is adding somewhere $15 to $20 to the oil price dissipates, then you will see oil prices come down,' Burns said.

He said inflation in the majority of developing countries remained 'relatively low or even very low.' He noted, however, that inflation was rising in the BRIC nations of Brazil, Russia, India and China that are dealing with a surge in private investment capital.-Reuters




Tags: World Bank | inflation | Crude | Oil Prices | Financial crisis | Economic Recovery |

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