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Rising oil prices pose economic risks

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Oil prices have been climbing steadily this year and may go higher still. Combined with a strong dollar and rising interest rates, this could have potentially severe effects on several countries and maybe even the global economy. The price of Brent crude - the most commonly used international benchmark for oil prices - has risen about 30 per cent from its 2018 low in February and crossed US$80 per barrel last week, which is the highest level since November 2014. Several analysts, from Mitsubishi UFJ Financial Group and Bank of America Merrill Lynch, for example, note that even at these elevated levels, there is still substantial upside risk to oil prices.

It would not be far-fetched to project oil at US$100 per barrel some time in the first quarter of next year, when the Northern Hemisphere winter reaches its peak. While the demand for oil is firm - given the strong US economy, economic recoveries in the European Union and Japan, and still robust growth in China - much of the increase in oil prices can be traced to supply side forces. The most important of these is the impending reimposition of oil sanctions on Iran in November by the United States. Iran is the world's third-largest oil producer and sanctions could result in Iranian supply falling about 60 per cent from its 2018 peak. Combined with the continuing decline in production from former major producers Venezuela and Libya - a consequence of the dysfunctional state of their oil industries - supply outages could get serious.

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A version of this article appeared in the print edition of The Straits Times on October 01, 2018, with the headline Rising oil prices pose economic risks . Subscribe