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Thursday, Sep 15, 2005

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Global economy expanding despite high oil prices

Batuk Gathani

London , Sept. 14

THE perplexing phenomenon in oil and fuel markets is that despite record high prices, investors on both sides of the Atlantic are basically ignoring American fears over supply position and the equity markets have moved up.

Today OPEC (Organisation of Petroleum Exporting Countries) is seen stepping up its search for new oil as governments apply pressure on oil prices.

The high oil prices in the wake of recent record rise ($70 a barrel last month compared to the current $64. 37 ) still remain operative at forecourts of petrol stations. Obviously, the average consumer is "not happy" and there is a clamour for eight to 10 per cent reduction in local retail prices.

In Britain, this has triggered a wave of "petrol panic buying" at retail petrol stations. The French and German petrol consumer is "comfortably subsidised" by the governments but the general scenario is depressing, as there is a growing concern about rising oil prices.

Higher oil prices may affect consumer spending and confidence. The US authorities are today considering raising interest rates but how will the major oil companies and governments resolve this dilemma remains to be seen.

The European Union governments have now resolved to follow a "unified and consistent" fuel pricing policy and lower fuel prices may lead to small cuts at retail level.

However, the European governments are handicapped by high tax revenue fuel generates and they have yet to find a formula to adjust to this reality. In Holland - the highest furl taxed country in the European Union - the average consumer is paying 90 per cent of retail price to the tax authorities.

According to analysts, it remains to be seen when this "status quo" situation is resolved. It is often argued that unless there is a basic change in the ruling governments - to be replaced by reformist administration - the status quo may continue .

In Germany - world's third largest economy — it remains to be seen if the Schroeder administration is replaced by centre right reformists led by Ms Angela Merkle, who may emerge as the first Lady Chancellor of Germany. According to the latest opinion polls, the outcome remains "highly unpredictable".

The European governments are reluctant to tell consumers that the oil prices could be lowered and the favourite argument is that they will continue to remain high with the upsurge of oil demand from China and India.

But despite $50 a barrel (price last year) global oil demand grew at the fastest rate in over 25 years. The demand is still rising and global economy is also expanding.

It was argued that high oil prices may drag down demand, but the reality is that despite current price at $65 barrel mark, the world's most prosperous economies are "flourishing" with high stock prices and major companies reporting record trading profits.

The more pessimistic scenario is that the oil bubble may burst and interest rates may fall - but all this is within realm of speculation. The reality is that investment markets and oil prices are booming.

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