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World: Record Oil Prices Have Little Economic Impact -- So Far

Soaring oil prices reflect the strong world demand for oil, still the world's major fuel source despite warnings over the years that supplies will dry up in the foreseeable future, and despite the increasing environmental costs. Prices for crude this week in New York hit historic highs of over $59 a barrel. But so far, the world economy seems to be shrugging off these prices, and continuing on its way.

Prague, 22 June 2005 (RFE/RL) -- The financial world is calculating that oil prices will soon rise to $60, and stay there for the rest of the year.

However, what is notably missing from the scene are cries of agony from oil consumers hit by the higher prices. In contrast to the oil crises of 1973-74 and 1979-80, the world economy seems to be taking the situation in its stride.

Why? A senior analyst with the Center for Global Energy Studies in London, Manochehi Takin, said that's something of a mystery.

"All analysts are also surprised that the higher prices [for crude] have not yet reduced demand," Takin said.

Takin offered two possible explanations for this. One is that, the price of oil being set in U.S. dollars, the prolonged weakness of the dollar against other major currencies like the euro and the yen has lessened the impact on many major oil users.

Another is that up to 80 percent of the price of petrol in Europe consists of taxes, which are adjustable, and tend to mask price hikes for the oil itself.

But neither of these factors apply to the United States. Taxes there are low, some 30 percent, so that a price increase is felt immediately at the petrol pump. And the exchange rate of the dollar is either neutral, as in the case of domestically produced oil, or negative, as it costs more dollars to import oil.
"One of the big issues is that the producing countries are opening less of their reserves to Western companies, so there are fewer opportunities for [exploration companies] to look for oil."

But in the four-week period to 10 June, U.S. petrol consumption rose by 3.3 percent, and distillates for heating, jet fuel, and diesel rose by 6.5 percent.

Takin explored another possible explanation -- that the present economic shock is not nearly so great as the rise from $11 a barrel to $30 a barrel was in the 1979-80 crisis.

"In terms of the real price of oil as it was in 1980, for example, we at present do not see the same effect on demand as a reaction to the high price as we all observed in 1979-80, because in real terms, that price [at that time] was much higher."

He said it's estimated that the price of $30 in 1980 was the equivalent in real terms of prices of $80 a barrel today.

Thierry Baudin, an oil industry analyst with SG Commodities in Paris, said the spike in prices is the fault of the oil industry itself.

"It is the consequence of underinvestment in the oil industry for many years," Baudin said. "It can be tackled, but that needs a lot of money."

Baudin said he sees underinvestment in both the "upstream" and "downstream" areas, meaning in exploration and production, and in refining capacity.

Baudin said this is partly the result of a more difficult political atmosphere among developing countries.

"One of the big issues is that the producing countries are opening less of their reserves to Western companies, so there are fewer opportunities for [exploration companies] to look for oil," Baudin said.

In Vienna, the spokesman for the powerful OPEC cartel of oil producers, Abdul Rahman al-Kheraigi, said crude producers are not to blame for the price rises.

"The problem is refineries, refineries and refineries," al-Kheraigi said.

Al-Kheraigi said the world stock of refineries is aging, and the United States has the additional problem that many of its refineries can only process "light" crude.

This makes them unable to handle the "heavy" and "sour" crudes which most of the OPEC countries sell.

The spokesman said it is essential for new refineries to be built.

"Unless we do something about the refineries, [oil] prices could continue to rise," al-Kheraigi said. "This is the message we try to get across."

Oil industry analysts said shortages in products like heating oil may develop on the world market this winter, particularly if the season is a severe one.