Rising Oil Prices Spark Fears for World Economy

Author: 
Amelie Herenstein, Agence France Presse
Publication Date: 
Tue, 2005-08-30 03:00

PARIS, 30 August 2005 — Oil prices shot past the $70-a-barrel level yesterday as a powerful hurricane bore down on crude-producing regions of the United States, prompting concerns for the world economy, which until now has weathered the surge in oil rates.

Some analysts are now predicting that prices could aim for the once unthinkable $80 a barrel - a level economists fear could severely dent consumer demand and curb business activities.

New York’s main contract, light sweet crude for delivery in October, touched a high of $70.80 in Asia yesterday morning on news that Hurricane Katrina was swirling dangerously close to the heart of US production and refining operations around New Orleans.

After the hurricane was downgraded a notch lower from a maximum category five storm, the benchmark futures contract was trading at $69.08 a barrel, up $2.95 from its close of $66.13 in the US market Friday. The price was more than double levels at the end of 2003. The effect on prices of the hurricane has been intensified by an unexpected fall in stocks of gasoline in the United States as well as anxiety in the wake of geopolitical friction between Iran and the west.

Market experts warn that the $80 level could be approached because efforts to strike a balance between supply and demand have been complicated by sharply inadequate refining capacity, notably in the United States.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global oil output, has launched an offensive to convince market players that there is in fact no supply squeeze. “We don’t have a shortage today, what we have is concern, and also we have problems ... refining,” said Adnan Shihab-Eldin, the acting OPEC Secretary General and research director. “That has been the main problem in the last couple of years.

Remember there has not been much expansion in the refining system for the past 20 years,” he told the BBC. “We expect again additional capacity from OPEC and outside OPEC to exceed demand growth. Therefore I expect prices sooner or later will begin to come down to levels that reflect fundamentals, not the levels that we are seeing today. I would be surprised to see prices to continue to go up.”

While economists do not hesitate to characterize the current situation as “the third oil shock, following those of 1973 and 1979-1980, they also contend that it will have a far less damaging impact on the world economy.

Industrialized countries have in recent years made considerable efforts to reduce their dependence on oil and to promote the use of natural gas and nuclear power.

US Federal Reserve Chairman Alan Greenspan said Friday that the US economy had held up under a sharp rise in energy costs, drawing strength from its flexibility. “The flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for crude oil and natural gas that we have experienced over the past two years,” Greenspan said.

Developing countries, on the other hand, have been hit hard by developments on the oil market.

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