Fears loom on `third oil shock'

By MARIANNE BRAY HONG KONG Monday 2 October 2000

As oil prices hit 10-year highs, sparking protests around Europe and prompting the US Government to dip into strategic oil reserves, the world's marketplaces are beginning to talk of a third oil shock.

"It can be argued that a third oil shock began in March 1999 and is now gaining momentum," economist Philip Verleger said in the journal International Economics Policy Briefs.

His comments came ahead of October crude soaring to levels not seen since the 1990 Gulf War, hitting $US37.80 ($A69.83) a barrel in New York on September 20. This was more than three times the lows of $US10 a barrel in late 1998.

But as world leaders begin to cut fuel taxes, dip into reserves, trim growth forecasts and warn of inflation, does the spiral warrant the label of a "third oil shock"?

Oil shocks - as seen in 1973 following the Arab-Israeli war and in 1979 after the Shah of Iran's fall - occur when oil prices spiral high enough to cause a worldwide recession, or significantly dampen global growth, which occurs when projected GDP growth falls by two to three percentage points.

From 1973 to 1975 oil prices rose fourfold to $US12 a barrel, and threefold from 1978 to 1981 to peak at $US34 a barrel. The rise sparked global inflation, spurring workers to demand higher wages, and dampening growth.

According to the US Government, the 1979 oil hike alone led to a 3 per cent drop in world GDP.

By all accounts, the rationing and panic-buying, the dipping into reserves and the calls for OPEC to take action, suggest the world is re-entering oil-shock hysteria.

But analysts argue that much of the posturing is rhetoric, since oil today plays a diminished role in a more energy-efficient and flexible service-dominated global economy.

The climate, they suggest, has been hijacked by oil-reliant unions in Europe and by a US Government seeking to cede its leadership to presidential candidate Al Gore.

In addition, the economy has changed, with oil consumption now making up only 1.4 per cent of US GDP, down from 6.3 per cent in 1980, a quarter of its share 20 years ago.

In fact, economists argue that prices would have to rise to almost twice their current levels - about $US68 a barrel - to trigger a repeat of the 1973 shock.

And "for a repeat of the post-1979 environment, oil prices would have to rise to around $120 a barrel", according to HSBC Securities global economist Stephen King.

The International Monetary Fund's chief economist Michael Mussa said in mid-September that if oil prices remained around current levels, global growth could fall by 0.25 to 0.5 percentage points next year to roughly 3.75 per cent.

Oil-reliant and less developed Asian countries, however, will be hit harder by oil price rises, economists warned. Asian Development Bank chief economist Yoshihiro Iwasaki said if oil stayed about $US35 a barrel for a year, growth in Asia would be hit twice as hard as in the rest of the world.

http://theage.com.au/news/20001002/A26352-2000Oct1.html

-- Martin Thompson (mthom1927@aol.com), October 01, 2000

Answers

Completely ignored in all of this are the chokepoints that prevent crude oil from becoming usable, consumable products. And, perhaps even more importantly, natural gas. It's litte-discussed natural gas that is the sleeper in this energy picture. The next recession will probably be a natural gas-inspired one, rather than oil.

-- Billiver (biliver@aol.com), October 01, 2000.

Has anyone anywhere seen any news reports or articles about the trucker protest in the United States or Canada? It's another of the ignored oil-impact stories that the media seem to be suppressing. I've picked up bits and pieces in chat rooms and a World Net Daily piece, but nothing in the so-called "popular" news media. Supposedly it began early last week in Louisiana and has spread to Texas and other parts of the South. I saw threads about it on the Countryside board and the TB2K EZBoard site.

-- Cash (cash@andcarry.com), October 01, 2000.