SINGAPORE (Reuters) – Tight oil supplies could leave the global economy worryingly vulnerable for years to come, a senior International Monetary Fund official said on Thursday.
David Robinson, deputy director of the IMF’s research department, said the relentless rise of oil prices meant the fund’s recent forecast of 4.3 percent global growth in 2005, published on Sept. 29, was already out of date.
Because oil has risen by about $5 a barrel since then the fund would probably pencil in growth of around 4 percent if it were to issue its projections today, Robinson said in a presentation to reporters and bankers.
“So there are clearly downside risks to global growth because of oil prices looking forward,” Robinson said.
U.S. light crude oil futures hit an all-time high of $52.38 a barrel on Thursday, while Brent crude futures, the most widely used international benchmark, hit a record $48.15 a barrel on the International Petroleum Exchange.
But prices remain well below historic highs when adjusted for inflation. And given that the world economy is due to grow this year at its fastest clip in 30 years, Robinson described the surge as “distinctly uncomfortable but still manageable.” He said he was more worried about oil supply bottlenecks, low inventories and, in particular, very low spare output capacity.
“This is perhaps the biggest concern right now and the biggest concern looking forward,” Robison said. “I do worry about the medium-term outlook, about the sustained vulnerability to oil prices.”
Robinson said it was significant that long-dated oil futures contracts had tracked spot prices higher.
This reflected expectations that spare production capacity — which according to the International Energy Agency was down to around 1 million barrels per day from an historical average of 4 million bpd — could not be increased quickly.
“We could well be in a situation where we have sustained low excess capacity in the oil market for a number of years to come,” he said.
WAKE-UP CALL
OPEC members had taken welcome steps to boost capacity but these were limited in light of world demand of about 83 million bpd, while demand for oil was not very sensitive to price increases in the short term, Robinson said.
The resulting price crunch was a wake-up call for the United States and other big oil consumers to accelerate energy-conservation steps and for oil producers to look more closely at the constraints on investment.
For Asia, rising oil prices posed a challenge in those countries where core inflation was picking up and some countries might need to respond by raising interest rates.
Robinson said India and China were among the countries where inflationary pressure was becoming a concern.
“That is something that the Reserve Bank of India will no doubt have to look at very closely,” he said.
In China, where it was far from sure that the economy would glide to a soft landing, the central bank also needed to consider whether it had taken sufficient steps to dampen growth and inflation, Robinson added.
Several Asian governments, including Indonesia, India, Thailand and Malaysia, have shielded voters from the impact of rising international oil prices by raising domestic subsidies.
Robinson said this was probably not the best policy response because the message from futures markets was that the surge in oil prices was more than a temporary shock.
“While it’s uncomfortable to deal with the short-run inflationary implications of higher oil prices, it’s also important to allow the price system to do its job and to tell consumers ‘Hey, you should be consuming less.’
“Otherwise you’re just perpetuating the problem and it can be very expensive,” Robinson said.
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