Resilient world growth flags long-run oil strength Daily Times | January 23, 2005 http://www.dailytimes.com.pk/default.asp?page==story_16-1- 2005_pg5_22 The world economy's surprising resilience to oil's record- breaking rally has strengthened signals in long-term crude futures projecting a renewed run of rising demand and high prices, analysts said. Conventional wisdom that a sharp, sustained rise in petroleum costs would drag back economic activity, even to the point of recession meant 2004's scorching crude rally drew cries of alarm from central banks and economic policy makers. In the end the 34 percent rise in prices seems to have done little to dampen economic growth, let alone fuel demand, oil analysts say. Such a robust performance may lay the foundation for another year of strong demand growth and high oil prices. "High energy prices have historically been thought to be a drag on economic growth," said Philip Verleger of the Institute for International Economics. "The global economy's performance last year seems to have refuted many of the studies on the subject, and the diminished linkage between economic activity and oil prices provides further support for expectations of higher prices in the future." Analysts say expectations for robust growth in demand and the economy in 2005 have helped support long-dated oil futures, which have retreated much less sharply than near-term prices over the past two months. Where the front month NYMEX crude oil future has slipped more than $9 a barrel, or 17 percent, since reaching a record $55.67 on October 25, the December 2009 contract has lost only $3.19, or eight percent, to sit just above $37 a barrel. Studies: A study by the International Energy Agency, the International Monetary Fund and the Organisation for Economic Cooperation and Development predicted that a year-long $10 hike in the price of crude from $25 a barrel would lose OECD industrialised countries 0.4 percent of GDP. IMF Managing Director Rodrigo Rato, European Central Bank President Jean-Claude Trichet, and U.S. Federal Reserve Chairman Alan Greenspan all pointed to oil as a risk to the fast-paced global recovery now running into 2005. In the event, 2004 average New York oil prices were a little more than $10 above those of 2003. Global GDP growth for 2004 is estimated at a storming five percent in the IMF's most recent World Economic Outlook � the fastest for three decades � and at a still robust four percent in the World Bank's Global Economic Prospects 2005. It is unclear how much faster growth might have been without oil's breakneck rally, but with 2005 growth forecast at 3.2 percent by the Bank and 4.3 percent by the Fund, oil analysts see plenty of support for prices. James Hamilton, Professor of Economics at the University of California, San Diego, and a frequently-cited researcher of oil shock economics, has characterised the current oil boom as significantly different from previous spikes. "The price increases that we saw in 2004 were primarily demand driven, and that reflects a strong world economy," he said. That endogenous price rise sits in contrast with the sharp spikes caused by first the 1973 Arab oil embargo and then the 1979 Iranian revolution, both of which were caused by exogenous supply constrictions and were followed by recessions. Economists have said that although world oil demand has risen steadily since the 1970s, individual reliance on petroleum has decreased, particularly in the West, leaving the economy less of a hostage to crude prices. A weaker dollar has also eased the pressure on non-greenback economies like those of Japan and the Eurozone. Hamilton also noted that past oil price rallies that have followed sharp falls seem to have done less damage to economic growth than have stand-alone spikes, and that prices fell off dramatically in early 2003 before resuming their upward trend. "I don't think this price rise will have a big effect on the world economy in 2005," Hamilton said. "The price increases were a little bit sharper than I would have liked to have seen, but given enough time the economy can certainly adapt to higher oil prices." ------------------------ Yahoo! Groups Sponsor --------------------~--> What would our lives be like without music, dance, and theater? Donate or volunteer in the arts today at Network for Good! http://us.click.yahoo.com/TzSHvD/SOnJAA/79vVAA/NJYolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTEconomics. 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