As growth exploded in countries like China and India, oil prices rose. The problem is that the rise has been too fast and too steep and that has created distortion in the marketplace. Obviously, it has made everyone in the oil value chain very rich, but it has also hurt lots of other sectors of the economy and countries that are still not growing. And in the developed world, where it is impossible to have a normal life without an automobile, the higher gasoline prices forces consumers to cut back expenses elsewhere.
As the chart above shows, crude oil prices are hurting the global economy because they are so out of sync with incomes. Our analysis shows that a fair price for oil would be approximately $40 a barrel. Indeed, it will produce enormous short-term pain in countries like Iran, Russia, Venezuela, Iraq, and Saudi Arabia, in the end the whole world benefits from higher growth. Granted that many oil-producing countries have restructured their economies at oil prices greater than $100 a barrel, but it is best if they change their economics for the broader good.