World is ignoring risks of surging crude price

Oil prices at record highs, the dollar in the dumps -- warning lights are flashing but no alarm bells are ringing about the world economy, and some economists say the wake-up call could prove painful. The price of oil surged to a record high of $ 54.30 per barrel in London, compared with less than $ 30 in early 2003. Almost simultaneously the dollar crumpled, boosting the euro to $ 1.34 for the first time since early January on renewed concerns about the gaping US budget and current account deficits.
The tandem moves weighed on equity markets worldwide, with most falling and remaining under pressure. Despite the levels on oil and the dollar, however, there seems to be little concern. Politicians, who last year came out in droves to complain about high oil prices, particularly in the US, or strains in the currency markets, a sensitive issue for Europeans, are remaining discreet for now.

That restraint shows an adjustment to the situation, or at least an unawareness of its stakes, said Veronique Riches-Floris, chief economist at the French bank Societe Generale in Paris.
"The concern is that one is underestimating something which has major economic effects if it continues," she said. She said she had the impression that "everybody is a little asleep and at a given moment, that (the situation) risks resurfacing, in particular if the trends continue." It is a widespread view they will.

The Organisation of Petroleum Exporting Countries, which produces 40 % of global oil supply, has clearly signalled in recent months that it would control production to keep oil prices, which are denominated in dollars, high, to offset the dollar's weakness. As for the twin US deficits, there are no indications they will be reduced soon, which will continue to undermine the dollar.
While undeniably bad for most of the global economy, these trends are still not really being felt in the major economic indicators, Riches-Flores said. The overriding view is that the surge in oil prices last year basicallywas not as toxic to the world economy as feared, since it grew about 5 %.
"So finally, why not imagine that one can live decently with a completely unreasonable oil price?" she said.

Lorenzo Codogno, economist at Bank of America in London, sounded less alarmist. Political and financial leaders are certainly worried about the combination of negative factors, he said, but added: "It's probably too early to say whether this is just a temporary move or is there to stay."
A correction in oil prices is not ruled out for the coming months and according to Bank of America forecasts, the dollar could also start to appreciate.

On the economic outlook, "growth in Asia has been surprisingly strong recently," Codogno said, and the US economy was also holding up well.
"The global scenario is not bad at all," he said, noting the International Monetary Fund's growth forecast of 4.3 % in 2005. "Maybe it could be achieved," he said. The economist felt it was probably too early to forecast problems for the economy, but added that "another spike in oil could indeed change the outlook."