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Below [selected quotes and a comment, followed by the complete article] one of the Economist's 27 November 1999 Leaders argues that "Rich economies are also less dependent on oil than they were [in '73]." "Energy conservation, a shift to other fuels and a decline in the importance of heavy, energy-intensive industries has reduced oil consumption. Software, consultancy and mobile telephones use far less oil than steel or car production. For each dollar of GDP (in constant prices) rich economies now use nearly 50% less oil than in 1973." "On the other hand, oil-importing emerging economies-to which heavy industry has shifted-have become more energy intensive, and so could be more seriously squeezed." This is material worth mulling over while listening to or reading sermons on how the Middle East is the permanent and unalterable keystone for U.S. and Western European energy security. With regards, Nathaniel Hurd Boston, USA ***************************************************************** http://www.economist.com/editorial/freeforall/19991127/index_ld5716.html 27 November 1999 The Economist Leaders Oil’s pleasant surprise It seems that oil-price shocks are less shocking than they used to be COULD the bad old days of stagflation be about to return? Since OPEC agreed to supply-cuts in March, the price of crude oil has jumped to almost $26 a barrel, up from less than $10 last December and its highest since the Gulf war in 1991. This near-tripling of oil prices evokes scary memories of the 1973 oil shock, when prices quadrupled, and 1979-80, when they also almost tripled. Both previous shocks resulted in double-digit inflation and global recession. So where are the headlines warning of gloom and doom this time? Their absence is even more striking given that, at the start of the year, many commentators (including, rather prominently, this newspaper) expected prices to fall, not rise. OPEC’s agreement to cut output has so far proved more durable than many predicted. The oil price was given another nudge up this week when Iraq suspended oil exports in a showdown with the UN over sanctions. Strengthening economic growth, at the same time as winter grips the northern hemisphere, could push the price higher still in the short term. Yet there are good reasons to expect the economic consequences now to be less severe than in the 1970s. The sharp rise in oil prices follows an equally sharp collapse over the previous two years, when prices fell by more than half to their lowest level in real terms since before the 1973 shock. Even now, prices are not much higher than in early 1997. Moreover, in most countries the cost of crude oil now accounts for a smaller share of the price of petrol than it did in the 1970s. In Europe, taxes account for up to four-fifths of the retail price, so even quite big changes in the price of crude have a more muted effect on pump prices than in the past. Rich economies are also less dependent on oil than they were, and so less sensitive to swings in the oil price. Energy conservation, a shift to other fuels and a decline in the importance of heavy, energy-intensive industries have reduced oil consumption. Software, consultancy and mobile telephones use far less oil than steel or car production. For each dollar of GDP (in constant prices) rich economies now use nearly 50% less oil than in 1973. The OECD estimates in its latest Economic Outlook that, if oil prices averaged $22 a barrel for a full year, compared with $13 in 1998, this would increase the oil import bill in rich economies by only 0.25-0.5% of GDP. That is less than one-quarter of the income loss in 1974 or 1980. On the other hand, oil-importing emerging economies—to which heavy industry has shifted—have become more energy-intensive, and so could be more seriously squeezed. The impact on the output of oil-importing countries also depends on whether oil producers save or spend their windfalls. In 1973 and 1979 many OPEC countries already had current-account surpluses, and most of their extra oil revenues were saved. Today, many have large current-account deficits (Saudi Arabia’s hit 10% of GDP last year). Cash-strapped producers are more likely to spend their windfalls on imports from rich countries. One more reason not to lose sleep over the surge in oil prices is that, unlike the rises in the 1970s, it has not occurred against the backdrop of general commodity-price inflation and global excess demand. A sizeable chunk of the world is only just emerging from recession. The Economist’s commodity price index is broadly unchanged from a year ago. In 1973 commodity prices jumped by 70%, and in 1979 by almost 30%. Refining the argument Even if the impact will be more modest than in the past, dearer oil will still leave some mark. Inflation will be higher and output lower than they would be otherwise. The OECD’s rule of thumb is that a $10 increase, if sustained for a year, would increase the inflation rate in rich economies by about half a percentage point and knock about a quarter-point off growth. The impact of higher oil prices varies by country too. Perhaps the biggest risk is in America, where rising oil prices may push the inflation rate higher than is currently predicted. The slide in oil prices in recent years was one of the main factors that helped to hold down American inflation, so prolonging the country’s long economic expansion. That positive factor is now going into reverse. Higher oil prices have already helped to lift America’s inflation rate to 2.6% in October, up from 1.5% a year ago; the latest rise in oil prices could well push it above 3%. The core inflation rate remains relatively subdued, but headline inflation could still spill into wages and hence other prices. If it does, the Fed might be forced to raise interest rates by more than is now forecast. So OPEC could yet do more damage than most people expect. ----------------------------------------------- FREE! The World's Best Email Address @email.com Reserve your name now at http://www.email.comTitle: The Economist