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Hong Kong: Is the world heading for its third oil shock?
October 8, 2000
HONG KONG (AFP) - - As oil prices hit 10-year highs, sparking street protests around Europe and prompting the US goverment 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," said economist Philip Verleger in the journal International Economics Policy Briefs.
Verleger's comments came ahead of October crude soaring to levels not seen since the 1990 Gulf War, hitting 37.80 dollars a barrel in New York on September 20. This was more than a threefold rise from lows of 10 dollars a barrel in December 1998.
But as world leaders begin to cut fuel taxes, dip into reserves, trim growth forecasts and warn of inflation, does the latest 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 from power -- occur when oil prices spiral high enough to cause a worldwide recession, or significantly dampen global growth, which economists say occurs when projected GDP growth falls by two to three percentage points.
Between 1973 to 1975 oil prices rose fourfold to 12 dollars a barrel, and threefold between 1978 to 1981 to peak at 34 dollars a barrel, according to the US-based Energy Information Administration (EIA). 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-percent drop in world GDP.
By all accounts, the rationing and panic-buying fuelled by truckers demanding lower fuel taxes in Europe, the dipping into reserves and the calls by heads of state on OPEC to take action, suggest the world is re-entering the hysteria marking the first oil shocks.
But analysts argue that much of the current posturing is rhetoric, since oil today plays a diminished role in a more energy-efficient and flexible service-dominated global economy, compared to 1973 and 1980.
The current climate, they suggest, has been politically hijacked by strong oil-reliant unions in Europe and by a US government seeking to cede its leadership to presidential candidate Al Gore, six weeks ahead of the US election. In addition, the economy has changed, with oil consumption now making up a far smaller share of GDP. While crude oil made up 6.3 percent of US GDP in 1980, it makes up 1.4 percent now, a quarter of its share 20 years ago.
In fact, economists argue prices would have to rise almost twice their current levels -- around 68 dollars a barrel -- to trigger a repeat of the 1973 shock.
Meanwhile "for a repeat of the post-1979 environment, oil prices would have to rise to around 120 dollars a barrel," according to HSBC Securities global economist Stephen King.
This is a far cry from the current oil prices of around 30 dollars a barrel. Especially given that historical highs reached in 1981 equate to 70 dollars a barrel in today's money, John Cook, director of IEA's petroleum division, told the US Senate in July.
The likelihood of oil prices topping even 68 dollars a barrel is remote. The London-based Centre for Global Energy Studies said it expects Brent crude to average 31 dollars a barrel in the fourth quarter of this year.
And with more efficient labor markets, a "new economy" which boosts productivity without tripping inflation, and over 70 percent of workers in developed countries employed in the service industry, workers are not demanding a rise in wages as they did in the 1970s, economists add.
"The recent behavior of labor markets suggest that the inflation effect of even a 20-dollar rise in the oil price would be short-lived and the impact on growth even more muted," King added.
Additionally, the manufacturing sector, where oil is a major input, has diminished over the last two decades, so that the impact of any oil price shock will be much smaller today.
Indeed, economists assess the impact of today's price rise on growth as "muted." The International Monetary Fund's chief economist, Michael Mussa said mid-September that if oil prices remained around current levels, global growth could fall by 0.25-0.50 percentage points in 2001 to roughly 3.75 percent.
And as long as energy costs do not jump further and wage rises remain "compatible" with price stability, inflation should remain under control, the European Central Bank said in a monthly report September.
But despite optimism that the current prices are sustainable, oil-reliant and less developed Asian countries will be hit harder by oil price rises, economists warned.
Asian Development Bank chief economist, Yoshihiro Iwasaki, said if oil stayed around 35 dollars a barrel for a year, growth in the Asian economies would be hit twice as hard as in the rest of the world.
By Marianne Bray, AFP Correspondent
-- Carl Jenkins (Somewherepress@aol.com), October 08, 2000