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Home / Business / Economy

Oil prices to inhibit global economic growth, warns analyst

By Ercan Ersoy and Asli Kandemir
10 Aug, 2006 11:32 PM3 mins to read

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World economic growth may slow significantly if oil prices remain at current high levels for another year, the chief economist of the International Energy Agency (IEA) said today.

Oil supply additions in the next two or three years would come only from "a few countries in the Middle East," said
Fatih Birol of the Paris-based agency that advises industrialised nations.

"Record oil prices came at a time when the world economy was already performing strongly. So there will be no recession at this level, but there is only some loss on the economic growth," he told Reuters in an interview.

"But if the prices continue at these levels for another year they will significantly slow world economic growth and its impact will vary in every nation," he added.

Oil prices surged to record highs above US$78 ($125) per barrel after oil major BP said this week it was starting to shut down its biggest US oilfield, the 400,000 barrels-per-day (bpd) Prudhoe Bay field in Alaska.

Birol played down the BP move, attributed to corrosion in a pipeline. saying it had a "temporary impact" on oil prices. "But what can be worse is there are several old oilfields and pipelines in North America where output will fall in future," he said.

Oil companies currently spend a quarter of their investment for maintenance and improvements of existing facilities, while three-quarters go to new oilfield development, he said.

Birol said output from non-Opec countries, which supply almost two-thirds of global consumption, will rise to its peak level within next 10 years and then begin falling.

"It will fall because oil majors will not be able to invest in the main oil producing region of Middle East because such countries are closed to foreign oil investors," he said.

He said investors would be lured to areas like tar-sands in Canada's Alberta state, estimated to have 200 billion barrels of reserves -- comparable to the world's largest crude exporter Saudi Arabia's 262 billion barrels -- and West Africa.

Also, oil production outside the 11-member Opec nations may increase in Russia and Caspian in the next 10 years, he said.

"I do not think oil prices will come down significantly within the next two-three years," he said.

A cartel of gas producing nations considered by Russia and Algeria would prompt consuming nations to shift to other energy resources including coal and nuclear power, Birol said.

"For gas-producing countries it means shooting themselves in the foot because buyers have already begun questioning the rising prices and supply security of gas."

Birol said the ratio of US current account deficit to gross domestic product, which was 6.4 per cent in the first quarter, was the most important data to see the impact of oil prices on the world's largest economy and oil importer.

"The reason for this large deficit is oil prices," he said. "If the deficit goes higher, all other countries in will be affected varying levels, depending on their trade structure."

Current global oil spare capacity of about 2 million barrels per day, nearly half is sour crude, is "very vulnerable to natural disasters and to developments in Iran, Nigeria and Venezuella," he said.

"Such developments may further push the prices up. A comfort zone for spare capacity is 5 million barrels a day," he said.

"We think additional capacity from Saudi Arabia, Iran, Persian Gulf and Algeria will help spare capacity reach a comfortable level in the next five years."

- REUTERS

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