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Oil and growth

May 31st, 2008 · No Comments

From R-G

Oil price surge hits US growth outlook

By Krishna Guha in Washington

Published: May 29 2008 20:47 | Last updated: May 29 2008 20:47

The surge in the price of oil is putting further pressure on an
already weak US growth outlook even as it also fuels inflation.

Some analysts argue that the rise in oil will entirely offset the
stimulative impact of the tax rebates that began arriving in
Americans’ bank accounts this month.

That may not be true in the short term – the next couple of quarters.
But over a longer horizon, if oil price increases are sustained, the
oil effect will dominate.

A rise in the price of oil operates as a tax on nations such as the US
that are net importers of oil, while also transferring income
domestically between oil producers and consumers.

The US imports about 4.5bn barrels of oil a year. Since the start of
the year the price of oil has risen by roughly $30 a barrel. If
sustained this would equate to an extra “oil tax” of about $135bn a
year.

That money does not disappear – it is transferred to oil-exporting
nations. But only a fraction will return to the US in the form of
higher demand for US exports.

The $135bn-a-year extra oil “tax” is about one per cent of US gross
domestic product. It is roughly the same size as the tax rebate –
$110bn for consumers and $42bn for business this year.

The timing is different. The household rebates arrive in a lump sum,
whereas the oil tax is a continuing drain on household – and corporate
– income.

That means the income effect of the tax rebates will be much larger
than the oil tax in the near term. This will probably result in a
boost to spending by cash-strapped consumers through the middle of
this year.

But households that are not so in need of cash could save more of the
rebate to offset higher expected petrol bills in the months ahead.

Moreover, while the tax rebates are by design temporary, the oil tax
could be permanent. Much will depend on whether US households decide
that prices are likely to stay high, effectively reducing not just
income this year but their expected lifetime income.

Goldman Sachs says that when oil prices rise, American households
typically cut spending to offset half the increase in costs, and
dipping into savings to cover the other half.

This implies that they, in effect, treat the increase as half
permanent and half temporary.

If that proves to be the case this time, the per-dollar effect on
spending from the oil “tax” could be roughly the same or only
moderately higher than the per dollar impact of the rebate – which is
concentrated in a shorter period.

However, consumers could take the view that oil prices will stay high
because of pressures from China and India and constraints on supply.
In that case the per-dollar impact of the oil “tax” could be larger.

Even if they do not, Goldman Sachs says the rise in the price of oil
makes it more likely that a “modest pick-up in growth in the near
term” will be followed by a “renewed sharp slowdown in consumption” as
the rebate stimulus fades, but the oil tax remains. That raises the
risk of a “double-dip recession” around the turn of the year.


US to woo Gulf funds and urge oil price curbs

By Krishna Guha in Washington

Published: May 30 2008 03:00 | Last updated: May 30 2008 03:00

Hank Paulson, the US Treasury secretary, will invite oil producers to
invest their petrodollars in the US while urging them to take steps to
curb the price of oil in the medium term, on a tour of the Gulf that
begins today.

Mr Paulson is expected to tell Saudi Arabia, Qatar and the United Arab
Emirates that the US welcomes investment from Middle Eastern sovereign
wealth funds and other entities awash with oil revenues.

But he is also likely to tell these nations that it is in their own
interest to boost investment in oil production and cut subsidies for
domestic oil consumption to ease pressure on oil prices.

Mr Paulson will try to discourage Gulf nations from financial dealings
with Iran, and will urge them to do more to help Iraq and Afghanistan
through investment and further debt relief.

“We are open to sovereign wealth fund investment in various sectors
including the financial sector,” David McCormick, under-secretary for
international affairs at the Treasury, told the Financial Times ahead
of the trip.

He said Mr Paulson would assure the Gulf nations that sovereign wealth
fund investment would be treated as any other form of investment and
would not be discriminated against by US authorities. These funds have
invested close to $60bn (€38.6bn, £30bn) in US financial institutions
since the outbreak of the credit crisis.

Mr Paulson will also emphasise the role that capital market
liberalisation could play in helping oil producers to reinvest part of
their oil revenues efficiently at home in order to diversify their
economies.

The Treasury secretary is expected tor tread lightly on the subject of
currency pegs amid high inflation in the region. “Currency regimes are
a sovereign decision,” Mr McCormick said.

Analysts say the US does not want to give the impression that any
decision by another Gulf nation to follow Kuwait’s example and abandon
the dollar link would amount to a loss of confidence in the US
currency. But they expect US officials privately to highlight the
benefits of the dollar peg.

Mr McCormick said that oil producers were not in the same position as
large manufacturing exporters such as China. “A commodity-driven
economy with a lot of volatility in commodity prices could be a
beneficiary of a pegged regime,” he said.

The US delegation will stress the common interest both sides have in
ensuring that the price of oil does not remain so high and volatile.

Mr McCormick said high oil prices would over time spur changes in
“demand behaviour”, “consumer behaviour” and “investment patterns”.

“It is not clear to me at all that these countries that are largely
dependent on oil would have a vested interest in trying to maintain
oil at these prices,” he said.

The US will urge oil producers to increase investment in oil supply,
including by opening up exploration to western oil companies, and
reduce subsidies for local consumption of petrol and other oil-based
products.

“Subsidising oil consumption in the region and elsewhere obviously
creates distorted demand,” Mr McCormick said.


Indonesia pulls out of Opec

By John Aglionby in Jakarta

Published: May 28 2008 08:50 | Last updated: May 28 2008 19:19

Indonesia, Opec’s only Asia-Pacific member, on Wednesday quit the oil
cartel, finally accepting its dramatic shift from an oil exporter to a
consumer crippled by high prices.


Opec exit lacks impact but full of symbolism

By Carola Hoyos in London and John Aglionbyin Jakarta

Published: May 29 2008 02:16 | Last updated: May 29 2008 02:16

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