Oil prices "clear and present danger" to economies, IMF warns

Singapore (Platts)--22Sep2005

Higher oil prices are "a clear and present danger" to world economies as
they are feeding into inflationary pressures and eroding confidence, a senior
International Monetary Fund economist warned Wednesday.
     "Their limited effect on growth thus far was because they were themselves
driven up by unexpectedly strong demand growth," Raghuram Rajan, economic
counsellor and director of the IMF's research department told a press briefing
in Washington accompanying the release of the Fund's latest World Economic
Outlook. "Yet, increasingly, it is not news about unexpected demand but news
about supply shortfalls and potential future shortages, especially of refined
products, that are driving price increases," he said.
     Importantly, higher oil prices were "now adversely affecting confidence,
and with economies closer to capacity, may create stronger inflationary
pressures," warned Rajan, as per a transcript of the briefing from the IMF.
"Oil price increases are thus unlikely to be benign going forward, and they
are already affecting emerging markets and developing countries."
     Meanwhile, speculators were not responsible for pushing oil prices up,
but were simply joining the market rally that was caused by tight supplies and
limited spare capacity in the Fund's view, Rajan said, in response to a
reporter's question. 
     From the IMF's examination of statistics, "it does not seem that measures
of speculative interest precede the movement upwards in oil prices," Rajan
said. "So if you thought, for example, speculators were actually pushing
prices upwards, you should see people whom you consider speculators building
up positions as the price starts moving upwards, so in a sense, they are
pushing it upwards. We do not see that in the data." 
     "Our sense is that at least at present it seems more likely that
speculators are following prices rather than necessarily pushing the prices
upwards."
     Benchmark US sweet crude WTI shot above the psychologically important
$70/bbl mark to trade at historically nominal record highs at the end of
August, when powerful Hurricane Katrina slammed into the oil and gas
production and refining center of the Gulf of Mexico. The futures contract was
above $67/bbl in Asia Thursday, as another powerful hurricane stormed the
Gulf.

     TIGHT SUPPLIES BLAMED FOR PRICE RALLY 
     "There are reasons, a variety of reasons why prices, in fact, are moving
up, including the fact that there is very limited spare capacity, that in fact
there might be limited supplies of certain kinds of distillates, refined
products, like gasoline and heating oil, and that is what is causing price
movements upwards," Rajan said.  
     The IMF recommended that countries "pass through oil prices to citizens
instead of subsidizing them, so that citizens make the right consumption
choices" and also look at conservation measures. "Populism on the energy front
is not just harmful to a country but to the world, which faces an aggregate
supply constraint," Rajan cautioned. 
     The Fund at the same time called for more transparency in oil market
statistics. "For example, on the extent of reserves and the accessibility of
those reserves in different countries, but also factors like investment
intent, factors like the amount of production at different points in time, the
amounts of holdings, the quality of different kinds of products," Rajan said.
     The Fund was participating in some of the efforts going on to improve the
quality of these statistics, which could give market participants a better
sense of where the market was going and allow better investment and production
decisions, thus helping reduce price volatility, he added.
     The IMF left its global growth rate projection relatively unchanged at
4.3% for 2005 and 2006 in its latest outlook report, but its economists
expressed concern over high and volatile oil prices, "excessive dependence" of
global demand on US consumption, and an "elevated level" of asset prices.
     Lamenting a "savings glut" and "too little" investment globally, Rajan
said more investment was needed in low-income countries, emerging markets, and
oil producers.

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