High Oil Prices To Leave Global Economy With New Year Hangover

By Agence France-Presse Oil prices hit new highs above US$30 a barrel Dec. 30 on the back of a strike in Venezuela and the prospect of war in Iraq, putting a global economic recovery in early 2003 in jeopardy, analysts warn. The last time prices were so high was in the immediate aftermath of the Sept. 11, 2001, terrorist attacks in the United States. The price rally is good news for oil producers that rely heavily on oil revenues to keep their economies and public finances in good shape. But it has set alarm bells ringing in oil-consuming nations. Motorists are already facing higher prices at the pumps, while companies from manufacturers to airlines are seeing costs pick up. "It is a concern because higher oil prices essentially act as a tax on consumption," says Commerzbank Economist Nick Parsons. "In a world which is teetering on recession, all that happens is that it eats into firms' profit margins." Parsons says companies find it hard to raise prices to cover increased costs in times of recession, while consumers are likely to spend less on other goods if gasoline prices rise. "So I think that's going to dampen world economic growth and that's why we're not looking for any interest-rate rises anywhere in 2003," he adds. There was little sign of any respite for oil consumers Dec. 30, as prices pushed higher amid concerns that the strike in Venezuela might not be resolved before any war in Iraq begins. The loss of Venezuelan and Iraqi exports would deprive the oil market of about 5 million barrels of oil per day, analysts estimate. Although members of the Organization of Petroleum Exporting Countries (OPEC) have pledged to make up any shortfall caused by the loss of Iraqi exports, experts say they would be hard pressed to replace Venezuelan supplies as well if the strike drags on. Moreover, even if OPEC does agreed to pump more oil, the extra supplies are unlikely to arrive for several weeks yet given the time needed for members to reach a decision and to ship the oil from the Middle East to the United States. Copyright Agence France-Presse, 2002

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