Record global debt levels pose a clear risk to oil demand, the International Energy Agency said on Tuesday, citing figures from the International Monetary Fund last week that showed the world is awash with a record $152 trillion in debt.
The IEA on Tuesday forecast global oil demand will grow at a rate of 1.2 million barrels per day in 2017, largely unchanged from 2016 and down from 2015’s five-year high of 1.79 million bpd.
Years of low interest rates have encouraged sovereigns, corporates and individuals alike to load up on debt, which the IMF estimates is equivalent to 225 per cent of total global economic activity.
Financial markets have generally shown that investors anticipate a long period of low inflation and low interest rates. However, the 45 per cent rise in prices of oil this year means energy is no longer the “overwhelmingly deflationary" influence it was as recently as a year ago, the IEA said.
“If one believes futures prices, oil could continue to act as an inflationary pressure. Assuming the majority of other global price pressures remain deflationary, the current low inflation/low interest rate environment will most likely remain,” the IEA said in a monthly oil market report.
“If other costs start to reflect the potential oil-price upside, or at least lack of downside, then the status quo could rapidly change making incumbent debt levels a hugely restrictive expense,” the agency said.
In its Fiscal Monitor published on October 5, the IMF said while debt profiles can vary from one country to another, the sheer size of the debt could set the stage for an unprecedented private deleveraging that could thwart a fragile economic recovery.
“Hence, achieving the IMF’s central 3.4 per cent 2017 global economic growth forecast -- that underpins the demand forecasts carried in this report -- will not be clear sailing,” the IEA said.