Saturday, March 12, 2011

Oil & GDP Growth

Many people worry that the oil price increase caused by the civil war in Libya will hurt the global economy and perhaps push many economies into a recession.

However, the truth is more complex for that.

In Libya, the economy is certainly suffering, and had GDP statistics been compiled (which I really don't think they are during this civil war) they almost certainly would have shown that the civil war has caused a severe depression.

For other oil exporters however, the oil price increase will benefit the economy as their terms of trade improve, increasing their real income. However, as terms of trade improvements aren't visible in the headline volume GDP numbers, the headline GDP growth rate may not increase.

For net oil importers, the oil price increase will hurt the economy as their terms of trade worsens, reducing their real income. However, like with net oil exporters, net oil importers may not see the official GDP growth rate changed because the prevalent volume GDP methodology ignores terms of trade changes.

For the world economy as a whole, real income will fall as the price increase reflects lower oil output in Libya. Oil exporters except for Libya will benefit, but their gains will be smaller than the losses for Libya and net oil importers. However, the headline GDP statistics may not show much changes, because in Libya it is unlikely that any statistics will be collected and because the gains or losses for others is ignored by the prevalent volume GDP statistics.