A World Bank economist in Thailand is warning even if tensions ease in the Middle East, oil prices will remain high due to high demand from China, India and other industrialized countries.
High oil and commodity prices are contributing to inflation, which is now seen as a key concern in Thailand and throughout the region.
In a monitoring report on the Thai economy, the World Bank says global oil prices, now near $110 a barrel, combined with inflation, pose a threat to the global economic recovery.
International oil prices remain close to their highest levels since 2008. Global oil prices peaked at $147 a barrel in July 2007, before falling below $50 in late 2008.
Fragile recovery
The economies of the United States and the major industrialized countries in Europe are edging forward in what is still a fragile recovery after the 2008 - 2009 financial crisis. But World Bank country economist for Thailand, Frederico Gil Sander, says further increases in oil prices threaten recovery and spur inflation.
"Inflation has become a key concern for policy markers both in Thailand and overseas," noted Sander. "And the concerns about inflation are clearly related to the recent spike in oil prices. [And] we should not expect that oil prices are going to start declining very rapidly even if the situation in the Middle East is resolved. So the key message here is that we probably should not expect oil prices to decline very much - In fact they are likely to remain at relatively high levels."
Growing demand
Sander said higher fuel prices were also due to growing demand from newly industrializing nations such as India and China. The rise in oil costs also coincides with higher agricultural commodity prices, although those increases boost economies in countries such as Thailand by lifting farm incomes and wage rates.
Oil prices are also likely to be kept at high levels by increased demand from Japan, where damage from the March 11 earthquake and tsunami has led to the shutdown of one nuclear power facility. Around 30 percent of Japan's energy needs are normally met by nuclear energy. The quake aftermath is likely to result in increasing demand for oil in Japan in the medium term.
Economist Sander said further gains in oil prices could pose a real risk for the global economy and, by extension, the Thai economy. European economies, still recovering from the sovereign debt crisis, could have confidence undermined if economic adjustments again became more difficult.
"If oil prices continue to increase that would have very negative implications for the global economy. The recovery in advanced economies is still relatively fragile," Sander said. "Things seem to be getting better, but certainly if they are not hit by another very large spoke in oil prices the kind of positive developments in unemployment rates in the U.S. could be reversed."
Rising prices
But the World Bank says Thailand is likely to weather concerns over higher prices for food and fuel during 2011. Growth is forecast at 3.7 percent, an upward revision due to demand for Thai exports and domestic consumption driven by higher incomes.
But Sander says some foreign investors are staying on the sidelines to await the outcome of Thailand's general election, expected in July, before making a final decision on new Thai-based investments.
