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How long will markets tolerate rising oil prices?(Business, The (London) (KRT) Via Thomson Dialog NewsEdge) Apr. 23--IT should have been a week that sent stock markets reeling across the world. Almost every day brought news of oil surging to new highs -- and other key commodity prices with it. But have we developed a new tolerance for dearer oil? Hopes at the start of the year of only a gentle growth slowdown rested on several assumptions, one of them that the oil price would now stay below $60 (33.60, E48.60). Some hope. The price, up by about $12 since the start of the year, has been driven higher by persistent fears that demand will squeeze global supplies. Crude prices are now more than 40 percent higher than a year ago, and have risen about 5 percent since just last Monday, in a week that has seen not only crude and gasoline prices reach record heights, but also huge surges in other commodities, especially metals. The ongoing row between Iran and the US over Tehran's nuclear programme has been a key factor, fuelling concerns about the future of supplies from the world's fourth biggest exporter. Problems over Nigerian oil supplies have also featured. The Opec group of oil-producing nations has pumped 29.9m barrels per day (bpd) so far this month, an increase of 100,000 bpd from March. Uppermost in the minds of ministers from oil-producing countries and finance ministers and central bankers from the world's seven biggest industrialised nations at the G7 when they met this weekend in Washington is: how far can the price be pushed without a serious adverse impact on inflation, trade imbalances, interest rates and the global economy. Analysts say the oil price is likely to climb higher in the coming weeks as worries grow about how international pressure on Iran, Opec's No 2 oil producer, will affect its crude output. But the surprise amid this official hand-wringing is the sanguine manner in which the implications for global economic performance have been received in world markets. Stock markets across the world have continued to climb. Wall Street preferred to take its lead from hints by the new Federal Reserve chairman Ben Bernanke that the current interest-rate raising cycle may be near its peak. The stock market barrelled ahead. Markets in Tokyo, Hong Kong and Europe have also risen strongly. And in London the UK FTSE100 gained more than 100 points over the week to hit a new five-year high. To the extent that equity markets are pointers to economic performance 12 to 18 months ahead, this suggests no evident concern among global investors and fund managers about a significant downturn, still less a recession. Indeed, according to Opec's Monthly Oil Market Report, oil prices have more than trebled since the start of 2002, but so far the impact on world gross domestic product (GDP) has been only about 1 percent. And despite record nominal oil prices, finance ministers and economists are predicting continued growth. The International Monetary Fund (IMF), in its world economic outlook published last Wednesday, revised upwards its 2006 global growth forecast from 4.3 percent to 4.9 percent. Many will have been surprised at the upbeat summation of Nordine Ait-Laoussine, former Algerian energy minister and president of energy consultancy Nalcosa, at a conference earlier this month: "The price of $60 did not bring a recession . . . It's dampening oil demand growth and having a positive effect on the environment. "On the supply side, it's stimulating the growth of global output capacity, both in conventional and non-conventional supplies. As a result, it provides a security against future energy crises." So is there really cause to worry? There were signs on Wall Street late on Friday that the persistent rise in oil prices was starting to undermine the market's breezy confidence about the continuing strength of company earnings. And at the World Trade Organisation (WTO) meeting in Doha this weekend, ministers from 65 countries and executives from international oil giants such as BP, Royal Dutch Shell, Exxon Mobil and Chevron agree today's record prices are too high. Yet what is a "fair" level? And what is the level that would cause markets to halt the bull run? Even if the bigger economies are still thriving, non-oil developing countries are struggling to cope with rising fuel costs. And the strain is beginning to show. India's oil minister Murli Deora warned on Friday that the world's top oil producers must pump more to ease record oil prices or risk dealing a body blow to energy-hungry developing nations. "They must realise that such high prices should not give a body blow to developing nations," he declared. Despite the record oil prices, Indian oil demand, he added, will continue to grow. Indonesia, Opec's only net importer, has also been feeling the pinch. The country, Asia's fifth biggest oil user, doubled retail prices last October to try to cut its fuel subsidy bill. The increase sent inflation to its highest level in more than six years, slowed economic growth and slashed consumption as Indonesia's poor opted to travel less rather than pay more. And that upbeat IMF assessment last week is not without qualification. It has voiced concern about global imbalances as oil producers reap huge current account surpluses -- while the biggest energy consumer the United States sinks deeper into deficit. However, the "conventional" negative effects are less obvious than they were during the previous price shocks of 1973 and 1979. In real terms, the oil price was higher than today. Richard Batty, analyst at Standard Life Bank, calculates that the price of oil deflated by the US consumer price index "would have to be above $110 a barrel to match the prices seen in the early 1980s". Another difference is that previous price shocks encouraged energy efficiency, making the world much less energy intensive. Another change has been globalisation. "If the oil price moves up, companies will be cutting back on labour costs," said Batty. "Corporate behaviour and individual behaviour seem to be a lot different." But it is the United States, the world's biggest economy -- and by far the world's largest oil consumer, burning more than three times as much as the second-largest consumer China -- where the stresses of an ever rising oil price will be most keenly felt. The economy has shown itself capable of absorbing oil at $60. It may still enjoy some growth at $70. But the combination of $80 oil, interest rates at 5 percent and a falling dollar may prove just too much even for an upbeat Wall Street to swallow. Such a convergence of nasties would really put the squeeze on both US consumer spending and those bumper earnings that Wall Street has been celebrating so freely. |