Johannesburg - The most simple way to “measure” geopolitical risk is to look at the price of energy, according to Steen Jakobsen, European investment bank Saxo Bank's chief economist.
"Energy is everything for a macro economist as it’s a tax on the economy when high and a discount when low," he said.
"The high energy consumption makes it a critical part of any projection done, despite this energy assumptions are often exogenous."
He gives as an example that almost everything one does involves energy consumption.
"The world energy resources are primarily extracted from 'volatile' or underdeveloped regions, creating a real risk of disruption of supply. Herein lies a clear and quantifiable risk," explained Jakobsen.
"Overall there are many factors influencing the crude market, but the price of energy remains the one component we need to know is stable and preferably falling."
He said the overall impact from war is negative, despite what he calls the glorified analysis of how World War II stopped the recession.
"Think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria," he said.
"Many will argue it’s different this time, claiming back then we were too dependent on the Middle East. Sure, but prices where only between $10 and $25."
Now the world has become used to an oil rise in excess of $100 more or less since 2007.
Crude is now four times higher in price than during what he calls the “inflationist” 1970s.
To him the signal from the energy market about the demand for energy and the risk of getting enough of it is clear.
"Prepare for less growth, less certainty and more geopolitical risk," he warned.
At the same time he said for world growth to keep growing there needs to continue to be growth in Africa, Middle East and Eastern Europe.
"We need to accept the world is now truly global. We smiled while globalisation reduced prices and made our companies more profit," he said.
"Now the escalation of wars reflects a world where growth is short, energy is expensive and increasingly hard to get and we have gone full circle with macro and interventionist policies."
He warned that everything economic has a delayed reaction of nine to twelve months and regarding the escalation of turmoil in the world, "where there are a action there will be a reaction".
- Fin24