Wars often cause oil price shocks, which in turn end up in recessions. History is proof, as can be seen from the Iran-Iraq war and others. But some believe the impact of the ongoing Russian-Ukraine war and the resultant oil price surge could be more than fatal. The Covid-19 pandemic seized the global economy by its throat, and even though recovery has begun, it’s uneven and fragile. A needless oil price surge now will only add to the headache of policymakers and consumers. Until now, households have been tolerating inflation, which despite the bleating of central banks, isn’t transitory and oil’s relentless surge touching $139 a barrel early this week threatens to make us relive the days of demand destruction. Most central banks have been facing the predicament of hiking rates, or pausing to prop up growth for a while, but the fortunes of economies squarely hinge on the consequences of their move this time.
Asia, being a net importer of oil, is among the most vulnerable. Russia is the world’s largest oil exporter and any sustained price increases will flutter the dovecotes. In South Korea, inflation has already breached its central bank’s target due to soaring energy prices, while Thailand saw its inflation hit the highest since 2008 last month as the nation struggled with rising food and energy costs. The Philippines and Indonesia too are on the edge, making the role of Asian central banks pronounced.
India’s headline inflation has been hugging the RBI’s upper tolerance band of 2–6% for a long time, but the central bank isn’t budging citing tepid private consumption. Chances are that the current oil price surge may not last long and the cost will hopefully drop to $100 per barrel sooner or later. One encouraging bit is that Russian supplies haven’t stopped, perhaps because the country too realises that such a move will be self-destructive and of course catastrophic for the rest of the world. Until then, one can only hope to get by, taking comfort in the fact that our inventories will last until May, by which point price correction should happen.