We all know the havoc that oil prices can wreak on our pocketbooks. Higher oil prices mean higher gas prices and transportation costs, as well as higher prices for everything from raw materials to finished products.
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And some segments feel it more than others. "Oil prices have a greater impact on the manufacturing sector than on the overall economy, as measured by GDP growth," says Don Norman, economist with the Manufacturers Alliance/MAPI. Norman recently spoke about the impact of oil prices on the economy in MDM's monthly Economic Update podcast, available at mdm.com/economic-update.
The good news is that while global events such as the earthquake and tsunami in Japan and the political unrest in Libya have contributed to our sense of economic uncertainty, the reality is these events will likely have very little impact on oil prices.
The civil war in Libya affects the production of about 1.65 million barrels of oil per day – less than 2 percent of world oil production and an amount that can be covered by the ramping up of production in other countries, such as Saudi Arabia, Norman says.
Japan's impact is even less. Imports of oil products will likely increase to replace the lost power production of the nuclear plants, but there's plenty of stock available to meet those needs.
What may be a concern, however, is if the political unrest of the Middle East spreads to Saudi Arabia, Norman warns. Saudi Arabia produces around 10 percent of the world's oil currently and has the highest level of spare capacity.
"There's a certain amount of instability or fear that the Saudi regime is unstable. There certainly are groups in Saudi Arabia that would like to see things change in the way the country is governed," Norman says. "...It's pretty remarkable what's occurring. ... If this turmoil continues to spread, and the Saudi regime is attacked ... that would really set the world oil market into uncharted territory."
Hear more from Don Norman on the Business Outlook and global oil prices in the May Economic Outlook podcast www.mdm.com/economic-update