September 20, 2020
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What's Driving Oil Price Rise?

In the 1980s, oil prices determined developing countries' growth. Now, these countries' imports decide oil prices

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What's Driving Oil Price Rise?
Nliotpal Baruah
What's Driving Oil Price Rise?

Ever since Organisation of the Petroleum Exporting Countries’ (OPEC) oil embargo in the early 1970s (and especially after the 1979 Iranian revolution), high oil prices have been associated with global recessions in which developing countries can pay a heavy price. 

High-income countries went through deep recessions in 1974 and the early 1980s. Annual per capita growth in developing countries fell to less than 1% during the 1980s from 3% during the 1970s. Debt crises in middle-income countries were directly related to additional borrowing and rising interest rates as central banks hiked rates to tame an inflationary spiral triggered by the oil price spikes. 

In contrast, growth in developing countries is now stronger, despite oil prices being almost as high as in the early 1980s (corrected for inflation). In 2004, their per capita income growth was 5.8%, the strongest in four decades, twice as fast as growth in high-income countries. It was followed by 5.2% per capita growth in 2005. Performance in oil-importing developing countries was even stronger with per capita growth of 6% and 5.5%. 

It is very encouraging that strong growth is not limited to China and India. Even per capita output in Sub-Saharan Africa is now increasing at an annual pace of 3%.

What has happened? Are developing countries defying gravity? Is their performance now de-linked from oil prices? No, the contrary is true. While in the 1980s, high oil prices were pulling growth in oil-importing developing countries down, now strong oil imports in developing countries are pushing the prices of the commodity up. 

While supply disruptions were the main cause of the price spikes more than 25 years ago, currently the price increase is largely demand-driven. And developing countries are a major factor in strong global demand. The strong growth is the result of institutional reforms, improved macro economic policies and integration into world economies. 

This is all positive news, but the current situation is not without challenges. First of all, even if output growth remains strong in oil-importing developing countries, they still have to adjust to the higher oil import bill, which increased by some $120 billion over the last three years. It is important that price increases are passed on to consumers to reduce oil demand and export competitiveness to help pay the higher oil bills. Secondly, if, as a result of geopolitical tensions or otherwise, global oil production falls as was the case in the earlier periods, the impact on the global economy may be much more severe. 

However, developing countries are now ready to confront these problems. They are not defying gravity, but they have gained a lot of gravitas. 

Hans Timmer is Manager (Global Trends Team), Development Prospects Group, World Bank. This article originally appeared in Outlook Business, June 20, 2006.

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