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THE WALL STREET JOURNAL: Oil-Price Shock Tops List Of Global Economic Risks Amid Supply, Geopolitical Worries

January 30, 2006; Page A2
DAVOS, Switzerland — The good news about oil is that even if terrorists were to blow up key infrastructure around the world, there probably would be enough reserves to make up the shortfall for as long as a year. At least that was the conclusion from a crisis simulation held here at this year's World Economic Forum.
The bad news: Oil prices would still soar as high as $120 a barrel, and economists, chief executives and risk analysts gathered at Davos still put an oil-price shock at the top of their list of global economic risks. Lack of spare output capacity and growing worries over geopolitics are making that more possible, they say.
In fact, some economists say the U.S. economy already is suffering from an oil-price shock. It just doesn't realize it yet. Research by Washington-based consultant Robert F. Wescott, a former International Monetary Fund and White House economist, suggests oil prices are already hurting stock prices, and may hurt profits and growth.
See video reports from Davos including publisher Mort Zuckerman and Cisco CEO John Chambers. Plus, track the latest Davos news.Mr. Wescott looked at what has happened to U.S. stock prices since 1950 when corporate profits rose sharply, as they did last year. He found that stocks rose by an average 21.5% when profits were up by 30% or more — except in 2005. Last year, profits rose about 30%, but stocks were flat. In Mr. Westcott's view, oil prices are the key reason.
“Oil prices have been creaming our companies,” he said after the simulation. The only reason the oil-price surge hasn't hammered U.S. growth, he said, is that job creation in housing-related sectors of the economy and mortgage-equity withdrawals have kept U.S. consumers spending, despite higher gasoline and heating costs. As the housing market slows, he says, that cushion will disappear and the ill effects of expensive oil will become clear. He cited weak U.S. growth figures for the fourth quarter of 2005, released last week, as evidence.
Mr. Wescott's is a minority view. Most economists believe the oil-price rise of recent years has had little impact so far. But his contention underlines a general unease that with oil prices now over $60 a barrel, the global economy might not weather an additional runup the way it has handled the climb so far.
To test that question, a four-hour energy-crisis simulation held at the forum here assumed that a series of terrorist attacks had taken about 5% of daily oil production off the market. Saudi Aramco Chief Executive Abdallah S. Jumah said afterward that his company could pump about an extra 1.5 million barrels a day. Strategic reserves released by the International Energy Agency, together with increased output from other producers, could cover the rest of the deficit.
Royal Dutch Shell PLC Chief Executive Jeroen van der Veer said at a separate news conference that there was “no need for pessimism” about energy. The current high oil price would stimulate investment and new energy supplies, he said. Similarly, Fatih Birol, the IEA's chief economist, said the response to Hurricane Katrina in the U.S. last year showed that the agency was willing to use its strategic reserves and that markets were calmed by the move.
Yet the simulation still predicted oil prices would soar to as much as $120 a barrel. Roland O. Rechtsteiner, director of Mercer Oliver Wyman, which helped produce a report on global risks for the forum, said that was because markets would focus on the lack of any further capacity in case of another disruption.
Analysts in a similar Davos discussion a year earlier had predicted dire effects from $80-a-barrel oil. Meantime, oil in the real world hit $70, without killing global growth. But at $70, oil expenditure still makes up only about 4% of global gross domestic product, compared with 7% during the oil crises of the 1970s and 1980s. At $120, oil expenditure would make up nearly 8% of global GDP.
The driver for most of the oil-price rise has been growing demand from China and India, which has offset the potentially inflationary impact of the price increase with rising economic growth. But that has been changing, and price rises are increasingly the result of supply concerns. “This year, Chinese oil demand grew by zero,” says Daniel Yergin, chairman of Cambridge Energy Research Associates.
The volatile Middle East's dominant share of oil output is projected to rise. To cushion against shocks, the U.S. and other developed countries, as well as fast-growing China and India, would have to cut their growth in energy use, according to Richard N. Haass, a former senior U.S. State Department official and now head of the U.S. Council on Foreign Relations. Noting the example set by the U.S., he added, “None of us can afford for them to take a trajectory in energy use that in any way resembles ours.”
Write to Marc Champion at [email protected]

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