OIL How Katrina Jolted the Entire Global Economy

Daily Mail (London), September 6, 2005 | Go to article overview
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OIL How Katrina Jolted the Entire Global Economy


THE human tragedy is turning into a global economic crisis. Oil and refined petroleum prices have soared in response to a catastrophe which has closed down production, refining and pipeline capacity in the Gulf of Mexico, one of the world's most important regions for energy.

The shockwaves are being felt across the world, from Germany to Indonesia, as well as on the forecourts of petrol stations in Britain where prices of [pounds sterling]1 a litre are now becoming commonplace. Panic buying has been reported as far away as the Czech Republic.

The disaster, which struck at the central artery of America's energy industry, could not have arrived at a more vulnerable moment.

Even beforehand, bottlenecks in energy supply and fierce demand from the Far East were driving up costs and raising the risk of an upsurge in inflation.

Here, Powergen upped the price of gas and electricity to five million British customers after higher oil prices at the start of this month.

The truth is that this natural disaster could not have come at a worse time for a global economy which is already at a tipping point.

Oil prices were already on the rise, partly because of strife in Iraq. But the effect of the hurricane has turned a difficult situation into a potential crisis. This year alone, prices have gone from $50a-barrel to $70a-barrel today.

Everywhere, there are increasing signs of alarm. EU leaders are blaming high energy prices for disappearing growth and recovery.

In Indonesia, the world's fifth most populous country, high oil prices are being held responsible for a run on the nation's currency which has the potential to upset the stability of all of East Asia as it did in 1997-98.

At $70a-barrel, the world oil price is now heading towards the $80-abarrel zenith (after adjustment for inflation) in the aftermath of the first Gulf War in 1990. That oil price shock, like those during the Arab-Israeli war of Yom Kippur in 1973 and the Iranian revolution in 1979, was followed by a period of high inflation and then recession and higher unemployment.

The Paris-based OECD, one of the most respected economic forecasters, estimates that every permanent $5a-barrel increase in the market price of oil lowers the growth of world output by as much as 0.3 per cent.

Experts are warning that it will be extraordinarily difficult to restore the American economy to where it was before Katrina. The current crisis in the world oil markets has been driven by factors ranging from exceptional demand from energyhungry nations to security concerns in the Middle East and Iraq, as well as heavy speculation by global investors seeking to make quick profits.

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OIL How Katrina Jolted the Entire Global Economy


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