Kuwait Times

Published Date: July 18, 2007
By Roland Jackson

The world economy is bounding ahead, largely unaffected by record high crude oil prices, which have quadrupled over the past six years, economists say. Oil prices have surged close to record peaks in recent days owing to tight global supplies and fierce demand led by the United States and China - the first and second biggest consumers of energy in the world. A barrel of crude oil on world markets cost just $20 at the start of 2001 - and has since risen to close to $80.

The world economy will grow by a robust 4.9 percent this year and next, slightly down from 5.4 percent in 2006, according to forecasts from the International Monetary Fund. Deutsche Bank economist George Buckley argues that recent bumper gains in crude oil prices will be unlikely to crimp global economic growth. "It could be the other way around," Buckley said. "I think it's more likely that the strength of global growth is pushing commodity, including oil, prices up quite sharply.

He explained that the economic growth rates of China and other emerging countries were "good reasons to think why oil prices have gone up so much". According to the International Energy Agency, growth in global oil demand stood at just 0.9 percent in 2006, when the market was rocked by record high prices. But the IEA's current world forecast for this year is 2.0 percent - despite oil prices soaring close to historic high points. And emerging economic powerhouse China is forecast to record growth in oil dem
and of 5.0 percent in 2007.

Meanwhile, the OPEC oil producing cartel on Monday held its forecast for growth in global oil demand in 2007 at 1.5 percent, or 1.3 million barrels a day. The Organisation of Petroleum Exporting Countries, which pumps almost 40 percent of global crude, said demand would be particularly strong in the booming economies of China and India and in some Middle East countries. Growth would be "more moderate" in western industrialised states, it said.

Capital Economics oil market analyst Simon Hayley believes the world economy is far more resilient to oil price increases than in previous decades. "Developed economies have got a lot less oil-intensive since the 1970s," Hayley noted. "Now these economies are more service-based so there's a smaller proportion of GDP (gross domestic product) that is directly affected by these prices." Also, due to the greatly reduced power of trade unions, higher oil prices were less likely to fuel significant wage inflatio
n, he added.

Other analysts note that consumers have more faith in the ability of central banks to control inflation nowadays, meaning they are less likely to make big wage demands in anticipation of future price rises. Over the course of the past two years, the price of crude oil has consistently stayed above $50 per barrel. On Tuesday, New York's main oil futures contract, light sweet crude for delivery in August, touched $75.35 per barrel. That was last seen on August 10, 2006 and was within striking distance of its
record high of $78.40 set in July last year.

In London on Monday, Brent North Sea crude for August delivery hit 78.40 dollars per barrel, which was last seen on August 9, 2006 and extremely close to its record peak of 78.64 dollars hit two days earlier. High crude prices cause consumer price inflation by increasing the costs of transport, heating and other energy products. This sudden rise in the cost of consumer products and travel takes a chunk out of household incomes and could cause a slowdown in the whole economy.

Oil tends to be a relatively inelastic product, so people will still buy a relatively large amount of oil products, even if the price goes up," Buckley added. "When you raise oil prices the equivalent decline in quantities sold is not as sharp. In other words, revenues of oil companies go up, and disposable consumer income goes down." High oil prices increase costs for most companies, hitting oil-exposed stocks such as car manufacturers and airlines in particular, but oil companies benefit from the rise.
- AFP