IEA chief sees oil prices further denting economic growth

ISTANBUL (Reuters) – Record-high world oil prices will cut world economic growth by 0.8 points in 2005 and widen current account gaps both in rich and emerging economies, the International Energy Agency’s chief economist said yesterday. «If this year’s average oil price hits $50, then this will slash 0.8 percent of the world economic growth,» Fatih Birol told Reuters in an interview. Birol said World Bank and International Monetary Fund data showed oil prices that averaged $43.5 a barrel in 2004 had cut world economic growth by 0.5 points, as predicted then by IEA. New production facilities expected to come on stream in oil-producing nations by the end of this year can boost supply in early 2006, but even that would fall short of meeting the rise in demand in the short term, he said. «This may boost world output by 2-2.5 million bpd by June 2006, but this will create a limited impact in an era of high prices,» he said. If that new production, expected from Saudi Arabia, Brazil, the Gulf of Mexico and West Africa, does not begin as scheduled, then oil prices may go even higher this winter when heating fuel consumption rises in the United States, he predicted. «Besides demand, insufficient capacities by refineries that can produce light products from heavy oil is another reason for high prices,» he said. The IEA said in its monthly report last week that it had revised upward its world oil demand growth forecast by 20,000 bpd to 1.6 million bpd for this year and by 30,000 bpd to 1.78 million bpd next year. High oil prices are responsible for lower-than-expected growth in the United States and contraction in some European economies and for worsening current account deficits in emerging markets, he said. «Countries like Turkey are affected the most from high oil prices, which widen current account deficits,» said Birol. He predicted Turkey would pay $11.5 billion for oil this year, up $6 billion from 2004 due to high prices and rising demand. Despite a slowdown in its crude demand rise to «6 or 7 percent this year» from 15 percent in 2004, China still played an important role in the current levels of crude. Chinese oil demand, now around 3 million bpd, will catch up with US demand, the largest in the world, of 11 million bpd by 2030, he said. Greece more vulnerable Greece is in a notably more difficult position compared to most other European countries and members of the Organization for Economic Cooperation and Development (OECD) as a result of rising oil prices. In coming months, things are expected to get worse. In the last two years, the price of unleaded gasoline has gone up by an average of about 43 percent, now being sold close to 1 euro per liter in most of the country. And it is true the rise would have been higher without the Development Ministry’s market monitoring system. In 2004, Greece spent more than 6 billion euros on importing crude oil and related products – a figure which represents 3.9 percent of gross domestic product (GDP) and nearly 20 percent of the country’s trade balance. This amount would have been much higher had the US dollar not been so weak versus the euro throughout 2004 and early this year. According to data by Eurostat, the European Union’s statistics agency, the consumption of energy per percentage unit of real GDP did not change in Greece between 1991 and 2002, while in the 15-member EU it declined 15 percent and in the eurozone 9 percent. Moreover, energy consumption per percentage point of GDP in 2002 was 35 percent higher than the European Union average. Other Eurostat data show that Greek net oil imports represent 65.2 percent of gross energy consumption, against 44 percent in the eurozone as a whole and just 32.9 percent in the 15-member EU (the UK being an oil producing country). As in most developed countries, Greece’s transport sector (particularly private cars) accounts for the biggest part of oil consumption and 40 percent of all energy consumption in the country. This is expected to continue rising as the standard of living improves. In any case, it is clear that higher international oil prices and the government’s inability to work out – let alone implement – a national plan for the rational use of energy will make the already apparent problem for the economy even more serious. According to energy sector experts, the cost of fuel imports in 2005 will be 40 percent higher than last year, which means that refineries and other importers will pay a total of about 8.5 billion euros (5 percent of GDP), while net oil imports (after deduction of exports of petroleum products) will be 6-6.3 billion (about 3.5-3.6 percent of GDP) Rising oil prices also highlight the importance of power and natural gas market deregulation and of strong incentives for the tapping of renewable energy sources.