Oil prices fuel fears of sharp economic shock

www.theaustralian.news.com.au By Robin Bromby January 27, 2003

OIL prices have soared to their highest level since the 1991 Gulf War, fuelling fears of a sharp shock to the struggling global economy. West Texas intermediate crude rose to $US35.08 a barrel on Friday night, and analysts suggested the commodity might soon approach $US40 a barrel, a price last seen in August 1990.

An International Monetary Fund study shows each $US5 rise in the oil price slices at least 0.25 per cent off world economic growth.

Modelling by Morgan Stanley shows that oil at $US40 a barrel would deliver a sharp shock to world growth.

More immediately, each $US1 rise in the oil price can also push Australian petrol prices up by 1c a litre. There is usually a lag of about two weeks between a rise in the oil price and a hit at the bowser.

Financial markets will not be reassured by the latest statements from Saudi Arabia which indicate the world's most influential producer has no immediate plans to pump more oil.

Its Petroleum Minister, Ali Al-Naimi, told the World Economic Forum at Davos in Switzerland that there was plenty of oil available and there was no reason for prices to be where they were.

Crude oil prices have risen 55 per cent over the past year, largely due to the fear that there would be a war in Iraq.

To make matters worse, strikes in Venezuela have removed most of that country's three million barrels a day out put from the world market, and even now Venezuelan production is still well below one million barrels a day.

The Venezuelan Government has fired thousands of technical staff in the oil sector, and reports yesterday said it might be four months before the strike ended and full production was resumed.

Iranian Oil Minister Bijan Zanganeh said if Iraqi production was disrupted by war, it would knock another two million barrels a day off the world total.

Morgan Stanley chief economist Stephen Roach has said a $US40 price until the end of 2003 would knock 0.8 per cent off world growth and leave the global economy mired in recession.

A spike to that level for just two months would reduce growth by 0.4 per cent.

However, prices could drop to $US19 a barrel by the end of 2003 in the event of a "clean" war in which US forces seized the oil fields intact.