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Since February 25, crude oill has surged to $25.00 per barrel from $20.50, a 22% increase. Over the last two weeks, average gasoline prices rose 14.3 cents at the pump, an 11.6% increase and a record hike. The oil-futures market is now priced as if crude will average $24.04 in 2002, $23.60 in 2003, and $22.60 in 2004. These figures are a 10% to 20% increase in the October 2001-February 2002 price expectations. As was the case in 2000, the damage from artificially priced oil extends well beyond its direct impact on the economy through a reduction in disposable incomes and an increase in business costs. And there are more negatives. Already, the central banks in Europe and Brazil seem to be leaning in the direction of caution on the inflation outlook as a direct result of the oil-price spike. On the production front, to the extent that high oil prices force more-than-expected investment in oil production, it may reduce investment in non-oil parts of the economy. Stated differently, if world production from existing reserves is rationed, it forces more investment into that sector without adding to the world's growth potential. And while the U.S. economy is rich enough to adjust, the oil-price spike may materially reduce productivity in poorer oil-importing countries (for example, by making use of a tractor or pickup truck prohibitively expensive.) The oil cartel is adding to the volatility of oil prices. This is costly in terms of world growth, and uncertainty in the oil-price outlook adds to hedging costs and makes business planning more difficult. As we continue through this economic rebound, we can't take our eyes off the important oil factor. — Mr. Malpass is the Chief International Economist for Bear Stearns.
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height and duration of the ongoing spike in crude-oil prices and related
energy products is a cause for concern. If sustained for long, it will
create a big shift in the global investment outlook toward oil and gas
production.
