THE OIL WAR: What it means - Global economy gets hit when oil price skyrockets
NEW YORK - The most common cause of recessions - a surge in oil prices - is again afflicting the global economy.
Just as they have before every American downturn over the last 40 years, energy costs have risen significantly in the last year, capped by a sharp spike since December.
With more money being spent on petrol and heating fuel, economic growth has slowed in both the United States and Europe, and the uneven recovery that began in late 2001 is facing perhaps its biggest threat yet.
Most forecasters expect the US economy to avoid a new recession this year, saying that only an unexpectedly protracted war in Iraq would keep oil at its current price or higher.
But any war is an unknown, and the price increases for both oil and natural gas have already caused consumers to cut back on other spending.
The increases have also created a new problem for businesses trying to emerge from the hangover of the late-1990s boom.
'The economy is extremely fragile,' said Mr Mark Zandi, chief economist at Economy.com, a research company in West Chester, Pennsylvania. 'We've got some real problems if this drags on for any length of time.'
Energy costs began rising more than a year ago, when the Organisation of Petroleum- Exporting Countries cut production in response to the weak global economy.
The potential war in the Persian Gulf, political chaos in Venezuela and a cold winter in the United States caused the price of a barrel of oil to soar to almost US$40 (S$70) last Thursday, the highest since Iraq invaded Kuwait in 1990, before retreating to US$36.60 last Friday in New York. That is about 69 per cent higher than it was a year ago.
Every time the oil prices have risen by at least 60 per cent since World War II, a recession has occurred in the US, with the exception of a one-month blip in oil prices in 1987.
The current annual increase is similar in size to the jumps of late 1990, when a recession was starting, and the summer of 2000, nine months before another began.
Higher energy costs reduce economic growth by effectively forcing families and businesses to send more money to a small number of oil-producing countries, leaving less to be spent on goods and services that create jobs at home.
Energy prices affect Europe and Japan even more severely than the United States, which produces more of its own oil and natural gas.
Britain reported last week that its economy had grown at the most sluggish pace in 10 years during the last three months of last year. The German economy shrank at the end of last year for the first time in a year.
'The single best cyclical indicator for the world economy is the price of oil,' said economist Andrew Oswald at the University of Warwick outside Coventry, England. 'Nothing moves in the world economy without oil in there somewhere.'
In 1990, oil prices fell almost as soon as the US attacked Iraq, and many economists think the same thing could happen this year.
Even if a war temporarily reduced the supply of energy, President George W. Bush could release oil from the nation's Strategic Petroleum Reserve to bring down prices, analysts note.--New York Times