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World must live with high oil prices, IMF warns

By Carter Dougherty International Herald Tribune

Saturday, April 9, 2005

The International Monetary Fund has joined other financial organizations in warning about the effects that exploding global demand for oil could have on world economies, cautioning specifically that oil prices were becoming entrenched at unprecedented levels.

As part of its twice-yearly evaluation of global economic trends, the IMF predicted Thursday that oil could trade in 2030 at $67 to $96 a barrel, which in today's dollars would be $39 to $56 a barrel.

"The oil market will remain tight in coming years," said Raghuram Rajan, the director of the IMF's research department. "We should expect to live with high and volatile oil prices, which will continue to pose a risk to the global economy."

Other economists are also starting to worry more about the effects of a sustained rise in oil prices.

"Last year, high oil prices seemed temporary," said Sharada Selvanathan, an oil analyst with BNP Paribas in London. "Now, economists are getting used to this new world."

The investment bank Goldman Sachs roiled oil markets with a recent study that included a prediction that prices were in the early phase of a "super-spike" that could shoot past $100 a barrel, a contingency that the IMF declined to rule out.

The IMF's assessment also came amid worries at the European Central Bank that persistently expensive oil was cutting into growth among the 12 nations that use the euro. The ECB president, Jean-Claude Trichet, said on Thursday that oil prices were keeping inflation above the bank's target of 2 percent.

Both announcements marked another phase in the rolling acknowledgment by international institutions and central banks around the world that high oil prices, which seemed fleeting when they surged past $50 per barrel last autumn, are embedding themselves in the economic landscape.

Recently, economists have come to call this phenomenon a "permanent shock," a change in the language employed last year when higher oil prices were seen as temporary.

Rodrigo Rato, the IMF managing director, said this week that the high price of oil could slice 0.25 percentage point to 0.5 percentage point from global growth this year, the same effect that the Fund had predicted for 2004.

However, Rajan cautioned that greater energy efficiency makes a 1970s-style oil crisis unlikely.

Even if oil prices approached $100 a barrel, they would not compare, after adjusting for inflation, with the sky-high levels reached in 1979, when a sharp fall in supplies after the Islamic revolution in Iran turned the market upside down, Rajan noted.

Nevertheless, the prices today are already complicating the job of policy makers like those at the ECB.

The central bank has indicated it wants to eventually lift its benchmark interest rate, which has been 2 percent since June 2003, but it needs signs of solid growth in Europe before it can do so. Oil prices, together with a strong euro, have denied the bank any openings.

Alan Greenspan, the U.S. Federal Reserve chairman, has struck a more sanguine note. He acknowledged this week a "current price frenzy" in oil markets that has pushed U.S. gasoline prices to record levels. But higher prices could also spur greater conservation and reduce costs by curtailing demand, he said.

In the autumn, although prices were around $50 a barrel, futures markets in New York and London indicated that oil for delivery in six months or a year would cost around $40. But this year, markets have developed a more skeptical view and kept prices well above $50 for more than a year into the future, noted Selvanathan at BNP Paribas.

"To the extent that there is some kind of supply disruption, $100 a barrel does not seem outlandish," Rajan said, referring to the forecast made by Goldman Sachs.

He added that a price of $100 was not the most likely outcome.

An unprecedented combination of both demand- and supply-side factors has conspired to fundamentally alter the outlook for oil markets, the IMF said.

China's voracious demand for energy, which the U.S. government expects to grow 12 percent this year, has made it the second-largest oil consumer after the United States. Rapidly rising ownership of motor vehicles in China and other fast-growing Asian nations underpin this trend, the IMF said.

At the same time, major oil-producing nations have been unable to pump oil fast enough to build up depleted stocks, casting doubt on their ability to alter supply and keep prices stable, Rajan said.

"In short, it's going to be a rocky ride forward," the IMF research director said.

In late trading Friday on the New York Mercantile Exchange, crude oil for May delivery was down $1.16 at $52.95.

It touched a high of $58.28 a barrel on Monday.