Forecast Alert: No Relief from High—and Rising—Oil and Other Commodity Prices for Another Year

• First, and foremost, the growth in both real GDP and energy demand in emerging markets is likely to remain strong for some time. Stimulative macroeconomic policies—especially monetary policies—are the principal reason for sustained robust growth in the emerging world. At the same time, fuel subsidies are weakening the incentives to conserve energy and keeping energy demand strong. While some countries are beginning to tighten monetary policy and some are cutting fuel subsidies, these moves have been modest and are unlikely to have any significant impact until late 2009 or 2010. In the meantime, strong energy demand growth in emerging markets will outstrip additions to non-OPEC supply and will offset the declines in demand that have already occurred in the United States and Europe.
• Meanwhile, investment flows are piling into oil and other commodities as the best bets, at a time when growth and returns in the industrial world are low. These capital flows are unlikely to slow or reverse until central banks in the United States, Europe, and Japan begin a sustained round of interest rate increases. Global Insight does not see this happening until mid-2009—at the earliest—when the U.S. recovery finally gets under way.

The result of these two trends is even higher commodity prices in the near term:

• Global Insight now expects the price of West Texas Intermediate crude oil to peak at $160 per barrel in December 2008 (up from $124 in the previous forecast). Prices will remain high through mid-2009 and then retreat as demand growth slows. The WTI price drops to $130/barrel by the end of 2009 (compared with $111 in the prior forecast) and $105 by the end of 2010 (unchanged). Geopolitical events, such as conflict between Israel and Iran and more supply disruptions by rebels in Nigeria, could easily push prices even higher.
• The forecast of agricultural prices will also be revised upward, reflecting higher energy costs and flood damage to crops in the midwestern United States. Flood damage in the Midwest will push up prices in the near term. Nonetheless, rising wheat production in Russia, Ukraine, and other parts of Europe will help to moderate prices.
• U.S. consumer food price inflation is likely to be around 5.5% in 2008 and then improve only slightly to 4.5–5.0% in 2009.
• Stepped-up production has led to price corrections in some metals markets—nickel, lead, zinc, and titanium. On the other hand, steel prices have reached new highs. We expect a metals price correction in late 2008 and early 2009, but prices will remain well above previous plateaus. We also expect a petrochemicals price correction starting next year, due to global oversupply stemming from large additions to capacity in the Middle East and Asia.