IMF concerned over impact of higher oil prices

“Looking ahead, limited excess capacity in the oil sector is likely to persist well beyond 2006 and prices will continue to be susceptible to geopolitical events,” IMF said in its semiannual World Economic Outlook. IMF economists said to date higher oil prices have had a more moderate impact on the global economy than generally expected, in part because inflation has been held in check and much of the price runups have been driven by strong global demand. But looking forward, the IMF said it is worried the full effects of the recent surge in energy prices may not yet have been felt, especially if producers and consumers are still treating the spike as temporary rather than permanent. Helping to spur concern is the recent increase in “geopolitical uncertainties” in the Middle East, with options trading data suggesting a 15% chance that oil prices will spike above $80 per barrel by mid-2006, IMF said. Moreover, with prices increasingly being driven by supply concerns, such as China and India’s growing thirst for petroleum, the impact of higher oil prices may be greater than it has in the recent past, IMF said. To help cushion the impact of ever more volatile energy markets on world economies, IMF officials suggested that oil-producing countries, such as Saudi Arabia and Russia, eliminate obstacles to investment. They also called for a more equitable distribution of petrodollars so there is a suitable safety net for the poorest in oil-rich countries. Other suggestions included improving oil market data and strengthening conservation. The IMF report noted that ethanol, a frequently touted substitute to petroleum-based fuel is growing in popularity in many countries, including Brazil and the US, where fiscal incentives make it attractive. But economists cautioned the market is still in its infancy, given the need to ramp up a new infrastructure for the fuel and the vehicles. IMF economists also called on US officials to consider higher gasoline consumption taxes, noting the country now consumes a quarter of the world’s oil. That idea has typically been a political non-starter in Washington though, and this year will not likely be different given lawmakers are facing elections later this fall.

April 2006
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