The world economy has shown tenacious resistance in the face of spiralling oil prices, but a feeling of foreboding has grown recently as consumers and politicians face up to what might prove to be a permanent phenomenon. Anxiety has grown in the world's biggest oil-consuming nations, where complaints from motorists have increased in volume, prompting responses from governments that have offered suggestions to a problem over which, in most cases, they exert very little control.

The latest change seems to be the acceptance of high oil prices as a permanent development, resulting in “realistic language” from politicians, including the US Federal Reserve and French Prime Minister Dominique de Villepin, says chief economist at HSBC CCF in Paris, Antoine Brunet. “Central bankers were pretending to think that the increase in oil prices was just a bad moment that would pass,” he says.

At the moment, experts are divided about how high oil prices might go, with the most bullish among them forecasting a rate of $100 a barrel in the next two years.

Prices have already come a long way: since 2003, the price of a barrel of oil has tripled and is currently breaking new records as traders push the price towards $ 70. Indeed, some economists have already begun to talk about the “third oil shock”, the successor to the 1973 shock caused by the Yom Kippur war and the 1979-1980 upheaval triggered by the Islamic revolution in Iran.

“The evidence so far is that the economies have withstood the surge in oil prices quite well,” said Holger Schmieding, an economist at the Bank of America. The inexorable rise in prices has not killed off economic growth but has rather slowed the pace, he said. This view for the US economy has been endorsed by Federal Reserve Chairman Alan Greenspan. The International Monetary Fund has made similar remarks about the Asian economy.

Greenspan said on Friday that the US economy had withstood the oil pressure “reasonably well”. Antoine Brunet, who expects the price of oil to reach 75 dollars per barrel by the end of the year and $100 by the end of 2006, questions the likelihood of an oil-related recession.

The current situation of moderate growth in the world economy, largely fuelled by an increase in the US housing market and other industrialised economies, should continue in the immediate future, he said. “There is a trend of increasing wealth in the housing market, in the stock exchange, in the debt market. It's the main factor that means growth will continue,” including in less dynamic economies such as France or Germany, he added. Schmieding sees the housing market as a key factor: “At the moment, we are still in a situation where many parts of the world buoyant real estate markets are offsetting the negative impact of high oil prices,” he said.

In fact, unlike the period after the previous two oil shocks, the world economy might avoid the endemic inflation that eroded earnings and led to sharp increases in interest rates, said Emmanuel Lechypre, the head of forecasting at economics research body l’Expansion. There is a “recessionary effect”, particularly on household spending where the purchasing power of consumers is reduced by the higher energy costs, he explained, adding that companies tend to invest less because of the uncertainty. But the latest surge in oil prices is “a lesser evil” than previous shocks because an increase in interest rates has not been necessary to counter inflationary pressure.

The biggest danger is that inflationary pressures begin to mount in the future, and some experts believe the effects of the increase in oil prices will take some time to seep into consumer prices. With the boom in the housing market, consumer debt is at record levels in a number of countries, making households extremely vulnerable to increases in the cost of borrowing. “If we had an inflation shock like in the past, that would really spell disaster,” said Lechypre.

<I>Source: Times of India</I>