Nouriel Roubini’s RGE Monitor Newsletter explains the outlook for oil prices. While it looks like rising prices may be beginning to affect demand in developed economies, that demand slowdown may take a long time, and emerging-market demand may offset it:
Yet, so far slowing demand from OECD countries has been offset by persistent demand growth from emerging markets, especially fast-growing Asian and oil exporting economies. Many of these countries subsidize fuel prices, meaning that consumers are mostly sheltered from the price shock even if producers and government budgets are not. On the RGE Analysts EconoMonitor, Rachel Ziemba suggested that the persistence of price caps may inject uncertainty into the market and lower incentives to seek out alternative supplies for domestic markets. Yet, a limited price increase, such as the one that Indonesia just introduced, might result in the double whammy of rising prices while still swelling fiscal budgets. . . .
The lag between inflation and slower growth has been longer than expected and has revived fears of stagflation. Forecasters envision the oil juggernaut will lose momentum later this year on a global demand slowdown predicated upon the economic fallout of the credit crisis and/or the self-limiting effects of high inflation. Indeed, the oil futures curve has moved into contango, which tends to drive oil inventories higher and spot prices lower. Perhaps a sign of higher gasoline prices crimping demand, Americans are driving less than last year. On the other hand, the Baltic Dry Shipping Index and Dow Jones Transportation Average hit all-time highs last week, suggesting resilient global demand will not slow enough to dampen oil prices significantly this year. Historically, it took 4 years for U.S. consumption to decline after the 1979 oil shock . . .