Soaring oil price casts shadow over US economy

Oil prices surged briefly to a record high of 50 US dollars per barrel on Monday as the petroleum production in the Gulf of Mexico will not return to normal quickly after Hurricane Ivan and geopolitical unrest keeps traders on edge.

On the New York Mercantile Exchange, the price of crude oil for November delivery went up 76 US cents to 49.64 dollars per barrel. But the oil prices continued to climb in after-hours electronic trading to hit 50 dollars per barrel.

"The Ivan damage is persisting,"an oil analyst said in New York.

The United States has lost more than 11 million barrels of oil production in the past two weeks, according to government data, with the Gulf of Mexico output still down nearly 500,000 barrels a day.

The world oil prices have kept rising this year and hit several record highs in August, long before Hurricane Ivan struck the United States.

Analysts attributed the current higher prices to the strong recovery of the world economy beginning from the middle of 2003 which led to rising demand for oil and increasing fears of supply tightness in the future.

At present, global oil demand reaches about 82 million barrels a day and will continue to rise next year. However, the amount of excess oil production available is only about 1 percent.

At the same time, fears of severe disruption of world oil shipments resulting from terrorist attacks and the worsening situation in Iraq also helped push the oil prices higher.

The US economy grew at an annual rate of 2.8 percent in the second quarter of this year, a sharp slowdown from the revised increase rate of 4.5 percent in the first quarter and the lowest pace since the first quarter of last year.

A weak gain of personal spending, which accounts for two-thirds of the US gross domestic product (GDP) and is the major force in pushing the US economy forward, also reduced the pace of US economic growth. The big increases of spending on gasoline inevitably led to the reduction of spending on other consumer goods and leisure.

The higher oil prices have also caused a strong increase in consumer prices in the United States.

In the first eight months of this year, US consumer prices rose at a seasonally adjusted annual rate of 3.7 percent, compared with a rise of 1.9 percent last year. The "core" Consumer Price Index, excluding the prices of energy and food, also jumped to 2.2 percent this year after advancing 1.1 percent in 2003. Meanwhile, the prices of energy skyrocketed by 21.9 percent and those of petroleum-based products, 35.9 percent.

With the higher pressure of inflation in the country, the US Federal Reserve began raising short-term interest rate at the end of June, for the third time in the past three months.

The higher oil prices have affected most sectors of the US economy, particularly airline and trucking industries. The airlines in the United States, which have been struggling in the past three years, will face more difficulties in the future.

Analysts have predicted that the high oil prices will continue to slow the growth of the US economy in the rest of this year and the next year. They predicted that the economy will increase at an annual rate of 4.4 percent, compared with 4.6 percent forecast by the International Monetary Fund (IMF) earlier this year. The economic growth will further slow down to around 3.2 percent in 2005 from the IMF's early prediction of 3.9 percent.

But the impact of the high oil prices on the economy can not be over-estimated. In constant 2004 dollars, the present price is still some 40 percent below the record-high price in 1981. The output of the manufacturing sector accounts for about 16 percent of the US GDP and the high oil prices affect the economy much less than in the past because the US economy is much more service-oriented now.

Although it will continue to suffer from the high oil prices, the US economy will go on with its strong growth this year if no severe interruption happens in oil supply.

Source: Xinhua