World Bank fears the impact of oil price rise

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September 16 2000 BUSINESS NEWS World Bank fears the impact of oil price rise BY LEA PATERSON, ECONOMICS CORRESPONDENT

James Wolfensohn gave warning of the "negative effect" on the world economic outlook ) THE price of oil surged again yesterday, returning to the $33-a-barrel mark, as the head of the World Bank gave warning that higher fuel costs could seriously damage global growth.

Mounting tensions in the Middle East helped to send the price of London Brent crude up by more than a dollar, with the US cautioning Iraq that it would use military force if Baghdad threatened Kuwait, its neighbour.

The news added to growing fears about the impact of the high price of oil, pushing down share prices in London by more than 2 per cent.

London Brent hit $33.35 a barrel, close to the ten-year peaks seen last week, after Iraq accused Kuwait of sabotage and theft of oil in a joint zone straddling the border. Kuwait denied the accusations, which echoed those made by Iraq prior to its 1990 invasion, and sent nerves jangling in an already tense market.

"We haven't stolen anything," said Sheikh Sabah al-Ahmad al-Sabah, the Kuwaiti Foreign Minister. "If you take from your own land it can't be stealing."

The latest price jump came as James Wolfensohn, President of the World Bank, predicted that higher oil prices could cut up to 0.5 percentage points from global growth. Developing countries are set to suffer even more, with growth falling by as much as 0.75 percentage points.

"A $10 shift in oil prices can make a difference," said Mr Wolfensohn. "When you get into the range of $30 to $35 per barrel, it clearly has a significant negative effect on the world economic outlook.

"I would like to see the price come back to a more sustainable and moderate level as part of an effort to keep the world economy on track, and I would also like to ensure there is proper use of energy instead of profligate waste."

The International Monetary Fund (IMF), the sister organisation of the World Bank, is also expected to give warning of the effect of oil prices on global growth in its biannual assessment of the world economy, to be released next week.

Preliminary leaks of the IMF's forecasts suggest that, despite the rising oil price, the organisation will forecast global growth of 4.7 per cent for this year. This would be the best performance in 12 years and would exceed the IMF's April forecast by a half-point.

The organisation is expected to say that the US will again take the lead in global growth, with national income expected to expand by at least 4.9 per cent this year. Officials at the IMF, whose annual report yesterday revealed that the global recovery had given reserves a substantial boost, are also expected to be bullish about growth in Asia. Eurozone growth is expected to be 3.4 per cent during the year.

Fears that the rising oil price could damage growth helped to send share prices tumbling. The FTSE 100 index ended down 138.2 points at 6,417.3, with sentiment also depressed by a weak opening on Wall Street. News of the first fall in US retail prices for 14 years failed to cheer traders on either side of the Atlantic.

Falling petrol prices, which saw their sharpest drop since the end of the Gulf War, pushed the Consumer Price Index (CPI) down by 0.1 per cent last month. Markets had expected a 0.2 per cent rise. Analysts said the petrol price drop followed the fall in the crude oil price in July and predicted the trend would soon be reversed. Figures for factory production, which rose only 0.1 per cent, also boosted hopes that the US economy was heading for a soft landing.

http://www.the-times.co.uk/news/pages/tim/2000/09/16/timbizbiz03026.html

-- Martin Thompson (mthom1927@aol.com), September 15, 2000


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