Oil price spike puncturing global economic balloon

Elevated oil prices look like they're here to stay for some time, and while the healthy U.S. economy can withstand the surging prices, the rest of the world may not be so lucky.

From News Wire Services 9/18/00

WASHINGTON - The most serious energy crisis since the 1970s threatens to slow world economies and promises years of renewed concern over an old problem: the price and availability of energy. And while the big run-up in world oil prices is taking a toll on the U.S. economy in terms of slower growth and somewhat higher inflation, consumer confidence has not suffered, and neither economists nor government policy-makers see any sign that the bigger oil bill will tip the nation into a recession.

Prices of crude oil to be delivered next month hit a 10-year high of $36 a barrel Friday after the president of the Organization of Petroleum Exporting Countries, Ali Rodriguez of Venezuela, said the price might temporarily reach $40 this winter.

Each of the three prior oil price spikes in the last 30 years triggered a surge in inflation and sooner or later caused the economy to slump. In New York last week, President Clinton raised the possibility that rising oil prices might trigger a recession somewhere in the world, but he told reporters Friday that it is not very likely to happen in the United States.

Asked at the White House whether Americans should be worried about a recession, Clinton replied, "Well, I think in the short to medium term, the answer . . . is no. We have worked very hard over the last 25 years to be a more diverse economy and a less energy-intensive economy in a lot of our production. So we have withstood this oil price fight very much better than we did when it happened before."

Federal Reserve Vice Chairman Roger Ferguson told reporters that so far, the impact of higher oil prices has not spilled over into the prices of non-energy goods and services, though that remains a risk. And it has not had a significant effect on consumer spending, either, he said.

J. Alfred Broaddus, president of the Richmond Federal Reserve Bank, said the recent energy price rise presented a "manageable risk" to the otherwise very healthy U.S. economy.

But Clinton did cite the threat of global recession as he urged oil-producing nations to increase production.

Economic growth is slowing in South Korea and India because of higher prices for oil. The economies of European countries, already disrupted by protests about high gasoline prices, are especially vulnerable.

The U.S. economy, with inflation remaining low, does not seem to be suffering the effects of high energy prices. So far, the nation's greater productivity and its reduced reliance on oil and gas compared to the 1970s have offset the energy turmoil.

But the true effect of the higher prices may not be realized yet. Competition has generally prevented business from raising prices to offset their higher energy costs. But their incomes are being cut, just as every consumer of gasoline, diesel fuel and natural gas has less to save or spend on other goods because of the drain of higher energy prices.

While experts insist that there is not a shortage of oil or natural gas, there is little to spare. Commodities that were in surplus a year ago suddenly are in tight supply and subject to interruptions.

Indeed, the world's industrial system has so little cushion that the slightest hiccup can cause an extreme reaction. The buffer of surplus oil production in the world has been cut in half in the last year as prosperity in Asia, Europe and the United States has increased demand for fuel. Cambridge Energy Research Associates estimates that the oil surplus "cushion" is now equivalent to the annual output of Iraq.

Despite its seeming suddenness, the new energy problem has been taking shape for years, analysts point out. Relatively low prices for oil and gas in recent years caused a worldwide downturn in investment for new sources of fuel, said Joseph Stanislaw, president of Cambridge Research.

With little or no new supplies being developed since 1998, and demand rising as Asia's economies recovered from recession, today's tight supply situation was inevitable, Stanislaw said.

Clinton can release oil from the Strategic Petroleum Reserve to alleviate temporary oil price pressures on the U.S. economy. He is considering such a move but is waiting to gauge the effect of increased OPEC output. "We need to watch the situation closely," Clinton said Friday.

The long U.S. economic boom of the '90s gradually ratcheted up demand for energy, but sluggishness in Europe and stagnation in Japan limited the world's appetite. And Asia's short but intense economic crisis in 1997-98 helped to create a mini-glut of crude oil.

Today, the picture has changed. Much of Asia is rebounding strongly, and Western Europe is enjoying its strongest economic growth in years. Along with the remarkable continuation of the American boom, the industrialized world is robust. And a new economic player, China, increased oil purchases dramatically this year to fuel its rapidly growing economy, analysts report.

That is why, unless they induce a global recession, high energy prices are unlikely to be temporary. New oil and gas production cannot be brought in quickly.

Although investments now are increasing to develop oil and gas in the deep waters of the Gulf of Mexico and offshore Angola and other West African countries, it will take two to three years to bring supplies to market from such sources, analysts estimate.

So experts recall the 1970s, the decade when two oil crises sent oil from $2 to $40 a barrel and inflation to double digits and caused two crippling U.S. recessions.

"We're entering a new period of higher energy prices - not as severe as the 1970s, but a new, higher level for the next half decade," said Thomas Petrie, president of Petrie-Parkman Associates of Denver, which studies energy investments.

In Europe, where value-added taxes are tacked onto rising fuel prices - with the burden compounded by a sinking euro - the effect on living standards has sparked demonstrations by truckers, taxi drivers and others in recent weeks, shutting down economic activity.

In Asia, every $1 rise in the price of crude oil cuts hits economies such as South Korea with a double whammy, making exports less competitive by increasing costs and also depressing sales of automobiles, which Korean companies make.

Add the ripple effects of a slowdown in Europe or Asia, whose businesses and consumers would buy fewer American products and undercut this nation's export machine, and the direction is clear.

Such a slowdown would shift the economy's perspective, from today's enjoyment of growth to yesterday's concern about energy prices. Hybrid gasoline-electric cars that get 50 to 70 miles per gallon would be fashionable.

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Energy efficiency in industry will become a hot topic again, and thermostats in homes will be turned up a notch in summer and down in winter.

Meanwhile, the U.S. and world economies need new energy production and new conservation measures to keep prices reasonable and continue robust economic growth.

-- Martin Thompson (mthom1927@aol.com), September 18, 2000

Answers

Heard a 'financial guru'on Moneyline, didn't catch the name, mention oil at $50.

-- Martin Thompson (mthom1927@aol.com), September 18, 2000.

This nation's miracle worker, Alan Greenspan, is caught in a box on this one. He can't lower interest rates to spur a sputteing world economy, because an upticking world economy would demand still more oil, and he can't raise them because of the fast-accelerating oil prices, which would exacerbate the coming recession - make it much worse.

It will be most interesting to see what he does.

-- Chance (fruitloops@hotmail.com), September 18, 2000.