ALERT: Rising Oil And Weak Dollar Could Shatter World Economy
Rising Oil And Weak Dollar Could
Shatter World Economy
The Perfect Storm That's About To
Hit
By Jeremy Rifkin
The Guardian - UK 3-25-4
EXCERPT:
- "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."
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:
http://www.foet.org
