HONG KONG (BLOOMBERG) - Oil's surge to US$100 a barrel for the first time since 2014 represents a double blow to the world economy by further denting growth prospects and driving up inflation.
That is a worrying combination for the United States Federal Reserve and fellow central banks as they seek to contain the strongest price pressures in decades without derailing recoveries from the pandemic.
Brent futures in London jumped to as much as $101.86 as Russia's dramatic escalation of the Ukraine crisis sparked fears of a disruption to the region's critical energy exports.
While energy exporters stand to benefit from the boom and oil's influence on economies is not what it once was, much of the world will take a hit as companies and consumers find their bills rising and spending power squeezed by costlier food, transportation and heating.
Senior economist at Maybank in Singapore Chua Hak Bin said: "The oil price run-up will intensify the pressure on central banks worldwide to bring forward their tightening cycle and hike rates more aggressively to contain inflation risks."
More broadly, JPMorgan Chase & Co warns a run-up to US$150 a barrel would almost stall the global expansion and send inflation spiraling to over 7 per cent, more than three times the rate targeted by most monetary policymakers.
Oil has surged along with a broader rally in commodity prices that has also swept up natural gas. Among the drivers: A post-lockdown resurgence in worldwide demand coupled with the geopolitical tensions and strained supply chains.
Prospects for a renewed Iranian nuclear deal have at times cooled the market.
Still, the rise has been piercing. Just two years ago, oil futures prices plunged briefly below zero.
Fossil fuels - oil, as well as coal and natural gas - provide more than 80 per cent of the global economy's energy. And the cost of a typical basket of them is now up more than 50 per cent from a year ago, according to Gavekal Research, a consultancy.
The energy crunch also compounds the ongoing squeeze in global supply chains, which drove up costs and delayed deliveries of raw materials and finished goods.
The International Monetary Fund recently raised its forecast for global consumer prices to an average 3.9 per cent in advanced economies this year, up from 2.3 per cent, and 5.9 per cent in emerging and developing nations.
China, the world's biggest oil importer and goods exporter, has so far enjoyed benign inflation. But its economy remains vulnerable as producers are already juggling high input costs and concerns over energy shortages.
With price pressures proving more tenacious than earlier expected, central bankers are now prioritising inflation-fighting over demand support. US consumer prices surprising to a four-decade high sent shocks through the system, increasing bets that at one point had suggested the Fed will raise rates as many as seven times this year, a faster pace than earlier expected.
In an analysis of the winners and losers from oil's surge, Bloomberg Economics estimates Saudi Arabia can look forward to a windfall, Russia gains, while smaller oil exporters like the United Arab Emirates fare better too. The biggest losers would be energy importers such as South Korea, India and Japan.
For most consumers, and central bankers, much rides on how fast and how far energy goes, particularly if economies lose momentum globally.
A big enough oil shock could derail the normalisation plans of many central banks, according to JPMorgan economists "although the high inflation backdrop and concerns about anchored inflation expectations means policy would still be tighter than if inflation were currently running low."
