Americans face a bleak and expensive winter

Oct 21, 2004 02:00 AM

The word petroleum has its roots in the Latin word oleum, which means oil, and the Greek word petra, which means rock. The word petrified shares the same Greek root.
As the price of oleum has soared, the links between fear and petroleum have become clear to economists as well as etymologists. Fears of a heating-oil shortage this winter helped to push the benchmark price of crude (West Texas Intermediate for delivery in November) over $ 55 per barrel, a new record, on October 18th. The spike in oil prices, up by over 60 % since the start of the year, is, in turn, raising fears for the global recovery.

Even oil exporters are worried. The high prices they currently enjoy will slow economic growth next year, warned OPEC. If oil remains expensive, the cartel pointed out, people will buy less of it. China's demand already appears to be slowing. Its imports of crude oil, which grew by 37 % in the year to August, were up just 5.7 % in September, compared with the year before.
The US Energy Information Administration reports on America's oil and gas reserves. The International Energy Agency reports on the oil market and the world energy outlook. The US Federal Reserve posts Alan Greenspan's recent comments on oil and gives economic information. The European Central Bank gives information on its monetary policy.

For the first time since June, American motorists paid more than $ 2 on average for a gallon of petrol. To fill their tank these days, they must shell out almost 30 % more than last year. But the anxiety is not confined to the petrol pump. About 7.7 mm American households, most of them in the north-east, rely on oil to warm their homes. In a cold snap, they draw on stockpiles of heating oil, amassed at various points around the country.
But those stocks may not be piled high enough this year. According to government figures, America has just 49.5 mm barrels of high-sulphur heating oil in its inventories. This time last year, it had 55.6 mm. In and around New York harbour, which receives oil imports and distributes them to New York, New Jersey and New England, stocks stand at little more than 75 % of their levels last year. To heat their homes, New Englanders will have to pay 28 % more this winter than last, the government's Energy Information Administration predicts.

For their expensive winter, New Englanders can blame, in part, a tempestuous autumn. Hurricane Ivan damaged platforms and pipelines in the Gulf of Mexico, some of which are not likely to reopen before the end of the year. The Gulf is now producing only 73 % of the 1.7 mm barrels of oil it normally pumps each day. With less crude to distil, America's oil refiners have failed to keep heating-oil stocks at last year's levels.
It is not only New Englanders who are counting the higher costs of energy. In a speech, Alan Greenspan, chairman of America's Federal Reserve, calculated that the country's higher import bill for oil had already cost it 0.75 % of its GDP.
"More serious negative consequences" could follow ifoil prices were to climb "materially higher", Mr Greenspan said.

When the oil price started to catch everyone's attention in the spring, economists tried to put things in perspective. Prices would have to pass $ 80 per barrel to match the oil-price peaks of 1981 in real (inflation-adjusted) terms, they pointed out. Besides, oil-consuming nations now use about half as much oil for every dollar of output as they did in the 1970s.
According to an oft-cited rule of thumb: a sustained $ 10 increase in the price of oil would knock 0.4 % off the GDP of the rich, oil-consuming nations of the Organisation for Economic Co-operation and Development. It would cost America just 0.3 % of GDP. A drag, but not a shock.

But as the price has continued to rise, these historical comparisons have looked less comforting. Moreover, economists are now worried that their rough-and-ready rule may not be linear: that is, a rise in the oil price from $ 45 to $ 55 may be more damaging than a rise from $ 25 to $ 35. Increasingly, economists are abandoning their rules of thumb and crossing their fingers instead.
Two investment banks, J.P. Morgan and Morgan Stanley, have cut their forecasts for world growth to reflect the stubbornly high price of oil. As recently as September 1st, J.P. Morgan hoped America would grow by 4.5 % this quarter. Now it expects growth of 3.5 %. Japan is forecast to expand by 2.2 %, the euro area by just 1.8 %, much slower than the 2.8 % growth predicted.

The European Commission shares these diminished expectations. Its official growth predictions, to be unveiled soon, will no doubt take note of the damage oil prices might do to the European economy in the year ahead. Of course, the continent's nippy hatchbacks consume much less petrol than America's sport-utility vehicles.
Tax also accounts for a much higher share of the pump price. But the euro area produces much less oil than America. As a result, it is hit harder by high oil prices. Finance ministers from the 12 members of the single currency discussed the dangers at one of their regular meetings. Nicolas Sarkozy, France's hyperactive finance minister, has proposed giving back to consumers the extra tax revenues governments have raised from higher fuel prices.

If the fiscal authorities do not provide a cushion, perhaps the monetary authorities will. If oil prices stay high in the year to come, interest rates might stay low. Most central banks around the world, with the notable exception of the European Central Bank, have set off on a course of monetary tightening. But they may stop or delay along the way, to cushion the impact of higher oil prices.
Mr Greenspan gave no hint of such a pause. That may be because oil-price shocks raise inflation even as they dampen demand. If workers press for higher wages to compensate for higher energy bills, an inflationary spiral can ensue. Central banks are thus reluctant to ease monetary policy in response to an oil-price shock, even one that slows the economy.

Inflation remains at bay, for the moment, and most workers expect it to stay that way. There is little sign yet that higher oil prices are feeding into higher wage demands. It would thus be too much to say that central bankers are petrified by petroleum.
But as the price of oil sets new records, their rock-like confidence is beginning to crumble.

Source: The Economist Global Agenda
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