The threat of rising oil prices

Oil prices broke into fresh record territory last week, giving fresh ammunition to those who argue that this is not a passing trend. Coincidental factors, such as the catastrophic effect of the recent hurricanes and the consequences of the Nigerian oil workers’ strike, do of course have a share in pushing up oil prices. Still, everything seems to indicate that the surge is first and foremost a result of increasing demand prompted by China’s red-hot market. As US Federal Reserve Chairman Alan Greenspan said after an International Monetary Fund (IMF) meeting, demand is strongest for refined petroleum products, where demand exceeds supply. Oil prices, in other words, are going up because of the supply-demand gap. Without a doubt, profiteering is also a factor; but its role would be marginal if there was sufficient supply. The figures are striking. Oil prices have climbed by 60 percent during 2004, despite the fact that OPEC, the organization comprising the chief oil-producing states, are already pumping at record levels. Despite the fact that global markets have seen high prices and been hit by oil crises in the past, the current price spiral is deeply worrying, for it is a result of long-term factors. Should high oil prices linger, it would have a negative impact on global growth and, worse, it would mainly hit the economies which are net importers of energy and which are substantially dependent on oil as they have not developed alternative sources of energy. According to the chairman of the Center for Economic Policy Research (CEPR), Guillermo de la Dehesa, this is mostly going to effect the countries of the Mediterranean, Greece in particular. High oil prices could deal a severe blow to Greece, a country where the growth gains of past years are being undermined by the excess borrowing of the now-departed Socialist government of Costas Simitis. Unless the government takes measures to bring the Greek economy in line with the realities of the new global environment, Greece could risk backtracking from its gains. Such adaptation must be a top priority for the government of Costas Karamanlis. Greece must hammer out a policy for these new challenges and even be prepared for a long period of energy shortfalls should that arise.