Put away the stack-heeled shoes and the Slade records. Higher oil prices may have rekindled memories of glam rock and loon pants, but the west is not about to return to the days of sky-high inflation that marked the 1970s.
That was the good news Nov. 30 from the west's premier economic thinktank. From its headquarters in Paris, the Organisation for Economic Cooperation and Development (IECD) delivered a cautiously optimistic assessment of the chances of the global economy avoiding a fresh lurch into recession. Yes, it says, a higher oil price is putting the brakes on growth. Yes, it admits, the fall in the dollar could cause problems for certain parts of the world -- especially Europe -- but it is nowhere near as gloomy about the outlook as some of the Cassandras of the City and Wall Street.
Now for the bad news. It may be wildly premature to talk of recession, or even the real nightmare from the 1970s -- stagflation -- but high oil prices are here to stay, although the OECD believes it is unlikely stay at last night's high of nearly US$50 a barrel in New York. With global demand expected to remain strong, it thinks prices will be at US$35 a barrel by 2030 compared with US$27 in 2003. What's more, the world is going to become increasingly reliant on the turbulent Middle East for its supplies.
More reliant
And if the thinktank is even slightly out in its crystal ball gazing, by 2030 the price may be at least US$20 a barrel higher.
Notwithstanding more efficient use of oil in production, it is likely to retain its importance as a fuel in the longer term, increasingly for transport. Developing countries tend to have more energy-intensive economies, so rapid growth there could mean even stronger global demand for oil, perhaps adding US$20 a barrel to the OECD's baseline forecast for crude in 2030.
The problem, as the OECD sees it, is simple. As more and more countries seek to become richer, they consume more oil, and the poorer they are to start with, the more energy-intensive their growth tends to be. Rising demand acts as a signal to producers to increase supply, and fresh reserves will be discovered and exploited. Even so, demand will outstrip supply and so the price will go up. Moreover, the concentration of reserves in unstable parts of the world is a headache for the west.
"While global oil reserves are probably relatively ample, their distribution is likely to be increasingly concentrated on the Middle East members of OPEC, which already account for around two-thirds of global proved reserves," the OECD said.
In the short term, it added, there were real problems in producers increasing supply to meet the needs of oil-hungry countries such as the United States and China.
"Price volatility, compounded by geo-political tensions, raises uncertainty about underlying price trends and may depress oil production. OPEC's excess capacity is the lowest in three decades, providing little cushion to raise supply in the event of unexpected market disruptions."
Price volatility
One recent problem has been a shortage of tankers to transport crude, creating a bottleneck. It is concerned, too, that the message from the markets suggests that the days of an oil price below 20 dollars a barrel are over for good. "It is not clear how rapidly short-term factors boosting the oil price will endure, hampering the return to long-term equilibrium prices. However, some stickiness seems to be indicated by the far futures prices, which have risen to historical highs."
In the 1970s, the quadrupling of crude prices in 1973-74 and the further doubling in 1979-80 led to higher inflation, but the OECD believes the outcome will be different this time. Chief economist Jean-Philippe Cotis said: "It would be very surprising if OECD countries were to suffer again, as they did in the 1970s, from a nightmarish situation where wages and prices spiraled out of control and central banks had to switch into severe tightening mode."
The half-yearly outlook amplifies the point. "In most OECD countries, headline inflation has been pushed up (by higher oil prices), but core inflation and wage demands have remained subdued -- a tribute to the credibility built up by central banks since the oil shocks of the 1970s. Provided oil prices do not rise further, the global expansion should regain momentum in the course of 2005."
The rosy outlook is contingent not just on oil prices but on the foreign exchange markets being able to cope with a falling dollar.
Although the OECD is privately concerned about the recent sharp depreciation in the US currency, Cotis was careful not to throw petrol on the fire yesterday. Some adjustment to the value of the dollar was necessary to help reduce America's current account deficit, he said, but he had "no idea" how far it would go.
Growth
The OECD remains confident that its rich country members are merely suffering from a growth pause. Compared with six months ago, the OECD has raised its forecast for growth across its 30 members from 3.4 percent to 3.6 percent in 2004 but cut its prediction for next year from 3.3 percent to 2.9 percent.
The eurozone continues to be the laggard of the OECD in terms of growth, and the thinktank emphasized that monetary policy needs to remain loose. English-speaking countries -- Australia, Canada, the US and the Republic of Ireland as well as Britain -- had performed more strongly in recent years, with evidence that lower interest rates had had more impact on growth than in mainland Europe.
"The closer integration that monetary union was seen as bringing has not yet translated into any visible strengthening of trend growth or increased dynamism," the outlook concludes. Growth next year is expected to be 1.9 percent, up from 1.8 percent this year. The US is expected to grow by 4.4 percent this year and 3.3 percent in 2005. Cotis said, "In terms of the exchange rate, there will be side-effects. The Europeans may need to reflect on why they are incapable of autonomous economic dynamism."
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