Oil crisis? What oil crisis? By Brian Love, Reuters UK | April 11, 2005, http://today.reuters.co.uk/news/newsArticle.aspx?type=reutersEdge&storyID=2005-04-11T140305Z_01_DOB150326_RTRUKOC_0_ECONOMY-OIL.xml
Prices are sky high, China is fast becoming as big a consumer as the United States, conflict in the Middle East threatens deliveries and some experts say there's not much oil left in the ground. Yet, the International Monetary Fund says the world economy is a more efficient machine these days than during the crises of the 1970s and that a further surge to $80 per barrel would probably only trim growth by a quarter of a percentage point. Plenty of people seem not to share the confidence of the IMF economists who argued in a report last week the latest rise in the price of oil bore little resemblance to those that caused repeat recessions and mass unemployment 30 years ago. European Central Bank President Jean-Claude Trichet, a man who measures his words carefully, openly used the words "oil shock" at a news conference last week, adding: "This is something which is very unwelcome, I have to say, for global growth and also very unwelcome for the euro area." Oil prices are about three times as high as the low point they hit in 1999 and, at more than $50 a barrel, are more than double the level that both producer and consumer nations traditionally considered a fair trade-off. For the moment, most economists are banking on that kind of price becoming more permanent, barring any major crisis in the Middle East or some other event that could hit supply suddenly and send prices soaring to $80 or, according to Goldman Sachs to perhaps more than $100 a barrel. PESSIMISTIC VIEW Andrew Oswald, Professor of Economics at Britain's Warwick University, says the world is heading for trouble because it is using more oil, and discovering less, than ever before and that the new price surge is symptomatic of the underlying malaise. "We are heading into a dangerous period. 60 dollars and over takes us into risky territory in the western economies, where life still turns on petroleum more than is commonly understood. "When oil prices spike up, it is usually time to hunt for your crash helmet." According to recent World Bank figures, crude oil on average cost $18 a barrel in 1999 and $38 in 2004, while oil prices in the spot and futures markets have risen to well over $50 in recent months. Every major oil price spike has been followed by recession, whether it was linked to the Arab-Israeli war of 1973, the oil embargo that followed the Iranian Islamic revolution in 1979 or the Gulf war of 1990 that followed Iraq's invasion of Kuwait. Oswald says it takes about 18 months for the real damage to show as companies feel the pinch from rising costs for power and intermediary goods and either hike their own prices or cut staff to control costs. There may be no sign of the queues at petrol stations that seen in the 1970s, but that was what the experts call a "supply-side" crisis -- caused by embargoes or delivery cuts. This time, the main cause seems to be that suppliers cannot meet demand fast enough, especially from China. Most industrialised economies learned from the 1970s and now need only half as much oil to produce the same amount of goods. But more goods are produced and the world now needs more than 80 million barrels a day as opposed to 20 million in 1960. China, whose economy is growing twice as fast as the United States, is the second biggest oil consumer now, and other rising stars such as Brazil and India are unlikely to let environmental concerns prevent them catching up on the rest. BUT THE WORLD IS BOOMING? But if oil is such a problem, why did the global economy grow at it fastest pace in four years in 2004, at 3.8 percent, and why is it predicted to do only a little less well this year? Vincent Koen, a senior economist at the Organisation for Economic Co- operation and Development, acknowledges that nobody can predict with precision how much damage rising oil prices cause. "The big question is what growth would have been -- it would have been even stronger if it had not been for the headwinds from oil," he said. Because the world was recovering from a brief U.S. recession in the wake of the terrorist attacks of September 11 2001, interest rates have been kept at record lows for years, with cheap credit keeping business buzzing and boosting home-buying across the wealthy countries of the world. In Europe, the surge in the euro versus the dollar also offered some protection. Since oil is priced in dollars so euro zone countries got more oil for their euro, limiting the inflationary impact of oil's rise. Generally, forecasts about the likely impact of oil price rises focus on the shift in the terms of trade, the shift of wealth from oil-consuming nations to oil producing nations, and the belief that the latter release that money into the world economy more slowly, which does less for world growth. LOOK ON THE BRIGHT SIDE But not everybody agrees the situation is getting out of hand. James Hamilton of San Diego University in California says the latest episode may be manageable because the price surge is nothing like as brutal as that of the 1970s. Prices have risen steeply but over a longer period. That is a big difference from the supply crunch during the 1956 Suez crisis, the two 1970s crises or the build-up to the Gulf War at the start of the 1990s. "In each of these episodes there was an immediate drop in petroleum supplies that amounted to nearly 10 percent of global production," says Hamilton. He argues that the situation now is driven by demand from China and others and that output has risen to meet demand. So it is not like the days when the taps were shut off. "As long as this growth continues at a steady pace, increases in the price of oil are something to which the world economy can adapt," he said. ------------------------ Yahoo! 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