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Oil Prices Pose Risk to Global Economy, IMF Says

Multilateral bank recommends actions to mitigate price volatility

Posted: April 7, 2005


Raghuram Rajan
Washington -- High oil prices are likely to become a sustained feature of energy markets for years to come and will continue to present a “serious” risk to the global economy, an International Monetary Fund (IMF) official says.

Because world’s spare production capacity, now at less than one-third of the 2002 levels, is not expected to rise significantly any time soon, any supply disruptions or unexpected changes in oil demand can cause sharp price surges, Raghuram Rajan, the IMF chief economist, said.

Spare production capacity refers to oil reserves that can be quickly turned into crude oil and brought on the market to moderate oil-price increases.

“In short, it's going to be a rocky ride going forward," Rajan said.

He made the comments during an April 7 teleconference with reporters on the IMF’s biannual global financial stability report. (The transcript of the teleconference can be viewed online.)

According to IMF projections, oil consumption will almost double by 2030, driven by rapidly growing demand in major emerging markets such as China and India. In the short run, production capacity increases are not likely to be dramatic, however. Investment in exploration for and transport and refining of oil has not been “overwhelming” due to the high price volatility and restrictive regulations in major oil-producing countries, Rajan said.

David Robinson, deputy chief economist who also participated in the teleconference, said that high oil prices are likely to stay for the foreseeable future.

“We're looking at a situation where we think that the shock that we've seen to prices is a permanent shock,” he said.

In the report, the IMF projects crude real, or inflation-adjusted, oil prices reaching $34 a barrel in 2010 and rising to $39-$56 a barrel in 2030. These projections are above oil industry and International Energy Agency forecasts.

Robinson said that countries, particularly emerging markets, need to adjust to the new situation.

The IMF recommended a number of measures that working in concert could stabilize and possibly bring down oil prices. The recommendations include increased market transparency, reduced barriers to investment in oil-producing countries and larger strategic petroleum reserves in major oil-consuming countries. (The relevant chapter of the report can be viewed online.)

Federal Reserve Chairman Alan Greenspan said, however, that higher oil and natural gas prices should eventually decrease demand for energy and stabilize its prices.

Based on historical evidence, whenever higher prices persist, energy use declines over time, Greenspan said April 5 at a petrochemical industry gathering.

“Market forces play the key role in conserving scarce energy resources, directing those resources to their most highly valued uses,” he said.

Greenspan said that making cars driven by Americans more fuel-efficient will be of “critical importance” in conservation efforts.

But higher oil prices will not only increase conservation but also encourage broader exploration for oil and other fuels and research and development that can produce new approaches to energy generation.

Thus, he said, it is important not to interfere with market forces.

“We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion,” he said. (The full text of his remarks can be viewed online.)

On the same day, the House Energy and Commerce Committee started considering an energy bill that would provide incentives to increase supplies of oil and natural gas as well as electricity derived from clean coal and renewable sources.

The bill, which retains most elements of bills that stalled in Congress during President Bush’s first term, contains provisions that would ease regulatory restrictions on expanding refining capacity and building new terminals for imported liquefied natural gas.

Andrzej Zwaniecki
Washington File Staff Writer
(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

 

 

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