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Tech shares mania more of a threat than oil price Source: The Independent - London Publication date: Mar 09, 2000

THE PRICE of crude oil quadrupled in the first oil shock in 1973- 74, and doubled in the second at the start of the 1980s. Both plunged the global economy into recession and set off a disastrous surge in inflation. Is it possible that the trebling of the oil price during the past year will have an equally severe impact on the world economy? The efforts of the US to ensure an increase in oil supply, through vigorous diplomacy and perhaps a resort to America's strategic oil reserves, suggest that there is alarm on the part of the authorities. This is an election year, and the last thing this outgoing Democrat administration wants is trouble in the economy. Despite these signs of concern, however, the oil threat is not as potent as it used to be. Industry is a lot more energy-efficient in 2000 than in 1973 or 1980. The industrialised economies are not nearly as industrial any more anyway, so the share of GDP vulnerable to oil prices has shrunk. Policy-makers have also learnt hard lessons about how to react to a serious commodity price shock, and are unlikely to allow it to become embedded in the economy through rising inflation. In any case, the oil majors are likely to boost their production and exploration quickly once the price passes a high enough threshold. The oil-exporting countries have learnt their lessons too. They have no interest in plunging the world into recession. Equally, who can blame them for their determination to bring the price up from its low point 12 months ago of less than $10 a barrel - a level at which new exploration and development had become uneconomic. Their aim now - as a statement from the Saudis and Iranians made clear yesterday - is to judge how big an increase in output is needed to stabilise the price at a level not too far from today's price. If Opec alone will not boost supply enough to achieve stability, non- Opec producers would almost certainly step in to oblige. The futures market is pointing to a price of $24 by the end of this year. This could prove too optimistic, and further short term increases are likely before the uncertainty clears. Even so, the oil threat is plainly a good sight less potent now than in the past. The world is a long way from a mid-1970s style crisis of capitalism. If we are looking for threats to the world economy, they come not so much from a renewed oil price shock as the entirely self induced worldwide stock market mania for high tech stocks. This is an investment bubble, without any shadow of a doubt, possibly amounting to a very significant misallocation of capital. When it finally goes pop, as eventually it will, the economic fallout could be serious. Publication date: Mar 09, 2000 ) 2000, NewsReal, Inc.

-- Carl Jenkins (, March 10, 2000

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