O

il prices have risen as political risks have been added to fundamental supply and demand. Events in the Middle East have added uncertainty to investors’ expectations about where the market is heading, and that uncertainty has added a risk premium to the price of oil. Brent crude prices seem likely to average out around US$95 a barrel in 2012 – which basically means that the rise in oil prices of the recent past will endure in the future.

The instinctive reaction to an increase in oil prices is to say that it is “bad” for global growth. This, however, is wrong. Of itself, an increase in the oil price simply transfers money from oil consumers to oil producers. This transfer is redistributive, of course, but it does not have to impact global growth at all.

The impact on global growth is dependent not on the oil price increase, but on what oil producers do with their new found income. If oil producers spend their income then (like anyone else) it will be supportive for growth. If oil producers save their income then (depending on how it is saved) it is likely to be less cyclically positive.

The idea of oil price increases being “bad” for global growth owes much to the reaction of OPEC to the 1973/1974 OPEC1 oil price shock. Back in 1974 there was a dramatic increase in OPEC’s oil revenues, as the oil price soared.

But, OPEC’s imports from the rest of the world did not really change that much. What this means is that OPEC took cash from the rest of the world, but spent very little in exchange on the rest of the world’s output.

In other words, OPEC saved the majority of its oil revenue. The result, for global growth, was negative. Money was taken away from oil consumers, who consumed not just oil but everything. It was given to oil producers, who refused to consume. Global consumption was weaker as a direct result. As a result of that decline in global consumption, the world had a recession.

By 2008, however, things had changed. OPEC’s member states had a far greater incentive to spend their oil revenues. Populations had grown (rapidly) and economies were more sophisticated. As a result, OPEC was spending not 27 percent of its oil revenue, but 66 percent of its oil revenue on foreign goods and services.

Of course, OPEC’s propensity to consume in 2008 was still lower than the propensity to consume of oil consumers (the US has probably never saved a third of its income in the whole course of its existence).

The oil price hike of 2008 was still a drag on global activity – but not in the same way that it had been in 1974. Germany bought oil from OPEC, which transferred money from Germany to OPEC. But, in exchange, OPEC bought more cars from Germany and so gave at least some of the money back to the Germans.

Now we face another change among the world’s oil producers. OPEC’s political environment has encouraged oil producers to spend even more money (Saudi Arabia’s recent increase in social spending being just the latest instance).

The Saudi government is distributing more of its oil revenue to its population, and it is reasonable to assume that the population will take that money to the shopping mall and spend it on imported goods. If oil producers’ propensity to spend rises still further, then the damage to global growth from higher oil prices will recede. With the increased inclination to spend money, the global growth impact of transferring wealth from oil consumers to oil producers is mitigated.

So who benefits from a higher oil price? Aside from the obvious beneficiaries, consumers who are relatively energy (oil) efficient but who also export to the OPEC region are going to be best placed if OPEC spends a higher proportion of its oil revenue.

The Euro area leads the way as an exporter to oil producers, with the Chinese and Asian economies also significant. The Asian region’s exports to OPEC should continue to improve, as OPEC spends its oil revenue. A country like the United States, however, is less well placed.

The United States imports oil, but does not have so strong an export relationship with OPEC. As a result US growth is more likely to be impacted by the rise in oil prices than is the growth of the European and Asian economies.

The writer is deputy head,  Global Economics, UBS Investment Bank, London.