A Perfect
Storm About To Hit
By Jeremy Rifkin
25 March, 2004 by
the
The Guardian
The
average nationwide price of a gallon of gasoline in America reached
a record high of $1.77 this month. The steady spike in prices has left
analysts wondering if this is a harbinger of even more dramatic increases
as motorists head into the spring and summer months. Get ready for what
might become the economy's version of the perfect storm later this summer.
The devastation could quickly spread to the UK and the rest of the world,
with dire consequences for the global economy. The first hint of what
might be in store came last month when Opec announced its decision to
withdraw 1m barrels of crude oil a day from the market. Opec is worried
about the weakening value of the dollar: it has lost one-third of its
value in just under two years. Since Opec sells oil for dollars, the
oil-producing countries are losing precious revenue as the value of
the dollar continues to erode. And because oil-producing countries then
turn around and purchase much of their goods and services from the EU
and must pay in euros, their purchasing power continues to deteriorate.
(The euro is currently valued at $1.23.)
How will the weaker
dollar affect oil prices? Philip K Verleger, the dean of US oil market
analysts and a visiting fellow at the Institute for International Economics,
suggests that "oil-exporting countries may decide to adjust their
price band to reflect the falling value of the dollar". If the
dollar continues to slide, he warns, we could see oil prices rising
from the current $38.18 a barrel to a record high of $40 by midsummer.
There are other
dark clouds on the horizon. US crude oil inventories are at the lowest
point since the mid 70s, and the retail gasoline market is operating
with little reserve margin as we move into the summer months, where
more travel will increase demand. The dwindling oil reserves are made
worse by the White House decision to replenish the strategic petroleum
reserve, further reducing the amount of gasoline available.
Verleger says gasoline
could climb as high as $3.50 a gallon before leveling off at $2 by the
autumn. How high prices eventually soar could depend on still other
factors, including potential oil disruptions in Venezuela and the Middle
East. There is also the prospect that one or two major refineries might
fail during peak demand this summer - not that unusual when increased
consumer pressure forces refineries to produce at peak capacity without
taking the time for proper maintenance.
Here is where events
potentially begin to feed off each other, creating the conditions for
the perfect storm for the economy. If the price of oil increases to
$40 a barrel with an accompanying rise in gasoline prices, the already
weak economic recovery could stall.
How then do we lower
the price of a barrel of oil? We'd have to strengthen the value of the
dollar so that Opec would not be forced to raise prices to compensate
for the deteriorating value of the currency. But the dollar's value
is declining because of America's growing debt. The IMF is so concerned
about US debt - the result of rising budget deficits and trade imbalance
- that it issued a report warning that if steps weren't taken to reverse
the trend, it could threaten the financial stability of the world economy.
An ever-weaker dollar
makes foreign investors less interested in financing the mushrooming
US debt. The US could raise interest rates, making it more attractive
for foreign investors, but that would mean higher interest rates for
US companies and consumers, which could dampen the already weak recovery
and send us back into a recession in the US and around the world.
So we have all the
conditions coming together to create the perfect economic storm: record
oil prices triggering a restriction in US economic growth and an increase
in the federal budget deficit, accompanied by further erosion in the
value of the dollar - with increased budget deficits and the diminished
value of the dollar leading in turn to higher interest rates to convince
foreign investors to lend the US additional money, followed by a further
retraction of the US economy as rising interest rates lead to a drop
in domestic investment and consumption. The cascade of events touches
off a tsunami that engulfs the rest of the global economy, submerging
the world in deep recession.
As long as the US
and global economy are increasingly dependent on an ever-dwindling supply
of oil from the Middle East, the conditions for a perfect economic storm
will continue to haunt us. The solution, in the long run, is to wean
the world off its dependency on oil. That would require much tougher
fuel efficiency standards, greater energy conservation measures, support
of hybrid vehicles and a switch to renewable sources of energy. Short
of that, expect the storm clouds to gather in intensity.
· Jeremy
Rifkin is the author of 'The Hydrogen Economy' and president of the
Foundation on Economic Trends in Washington DC
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