MADRID, 22 August 2004 — The chief economist of the World Bank predicted in an interview published yesterday that oil prices would return in a matter of months to a stable level around $30 a barrel after hitting record highs this week of nearly $50.
Although prices closed down on Friday, many traders predicted that the volatile hikes would continue, but the World Bank’s Francois Bourguignon said that, once current uncertainties have dissipated, “I think we will return to a balanced price in a few months’ time.”
Bourguignon told the Spanish economic newspaper Cinco Dias that market forces would eventually stabilize the price. For example, producers would exploit wells that are not profitable at $30 a barrel, but might be at a higher price. But then an increase of supplies would have the effect of driving the price down again.
He said there were undoubtedly some objective causes for the price rises, such as China’s strong growth and economic recovery in the United States and Japan.
However, he said the price rise was also fueled by speculation and uncertainties over the fate of the Yukos oil conglomerate in Russia or the referendum in Venezuela. He discounted the crisis in Iraq because it had not been an important oil producer before the US-led occupation last year. The International Energy Agency said earlier this month that the market was in the grip of “irrational exuberance” even though “the market is tight, production and infrastructure capacity is less than desired and uncertainties continue to weigh on the market.”
However, the chronic volatility in Iraq in the face of attacks on installations by insurgents has contributed to a “security premium” of up to $15 a barrel, market experts in London said. Much of this nervousness is based on sentiment rather than fact. For example, a fire Friday in the northern oil complex of Kirkuk sent prices soaring even though the terminal was already out of action.
Asked what would happen if oil prices remained high for several years, Bourguignon said this could knock a couple of tenths of one percent off world economic growth each year, “but I do not think this will happen, because the market tends toward a balance.”
He said developing countries would be the hardest hit by a prolonged rise, with the exception of countries like China and India that have a high rate of economic growth. Europe has been cushioned against high prices by the strength of the euro against the dollar, in which oil is denominated. Bourguignon said it should not be necessary to raise interest rates within the euro zone because “in Europe, the economic situation is not yet good, and there does not appear to be a risk of inflation to justify a rate increase.”
The director general of the International Monetary Fund Rodriguez Rato said in an interview published in the Barcelona daily El Periodico Friday that the world economy was “in a phase of solid and generalized growth” of about 4.6 percent a year.
He said the increase in demand meant that new energy supplies had to be developed — current production by the members of the Organization of Petroleum Exporting Countries (OPEC) is nearing an all-time high of 30 million barrels a day. But Rato attributed the sudden rise in oil prices mainly to uncertainty and speculation rather than to pressure on supplies.
