Rising oil prices 'will hit fragile world economy'

PARIS: www.gulf-daily-news.com

A sustained increase in oil prices, seen as the most likely scenario should war be launched against Iraq, would hit at a bad time for a listless world economy.

The price of oil has been inching upwards for weeks under the double impact of a threatened showdown with Iraq and the strike in Venezuela, both Opec members.

Prices rose again on Friday over $30 a barrel despite an announcement by the Organisation of Petroleum Exporting Countries (Opec) that it may increase overall production.

This has raised eyebrows in two of the world's key economic zones, Japan and the western European-based euro zone, both now mired in relentless stagnation. The US economy, the bench mark that sets expectations for the rest of the globe, meanwhile is giving contradictory signals.

President George W Bush has raised hope with his pledge to announce an economic stimulus package next Tuesday even though US stocks began the year with an upward surge.

In the interim, experts have tried to quantify the fallout of any US-led intervention in Iraq by looking back at the Gulf War of 1991 - while conceding that there were different starting points for both.

"In 1991, the US was trying to climb out of a classic recession. Now, it is an entirely different situation. The economy has remained disappointing since the stock market bubble burst nearly three years ago. We have overproduced, and it's much more difficult to get out of this kind of situation," said Philippe d'Arvisenet, the chief economist at the French bank BNP Paribas.

A new armed conflict in Iraq could thoroughly shake the already fragile world economy, causing severe political instability in the Middle East and disrupting oil supplies to the rest of the world, particularly Asia which has little oil resources of its own and remains heavily dependent on imports.

The US financial ratings agency Standard and Poor's said on Friday in the event of a US invasion of Iraq, "confidence will fall and the costs of capital will increase. Many Arab countries will experience private capital outflows." The International Monetary Fund (IMF) also warned recently that a sustained price hike of $5 per barrel of crude would slow down growth in world economy by 0.3 points.