[A-List] US state: increasingly worried about oil

["Michael Keaney" <michael.keaney@xxxxxx>]

LEADER: Surviving oil shocks

Financial Times; Apr 14, 2004

With US Treasury secretary John Snow ratcheting up his criticism of Opec, it
is clear the Bush administration is alarmed about rising oil prices. But
while the negative impact of the run-up in energy costs is undeniable, it
has yet to derail the US economic recovery.

Compared with other rich economies, the US is notably energy-dependent.
Aside from Americans' umbilical attachment to their cars, life in the
rapidly growing cities of the southern and western states would be sweaty
and unpleasant indeed without air-conditioning. American energy use makes it
resemble a grimy, gas-guzzling developing economy more than a green rich
nation: a dollar of US gross domestic product takes one third more energy to
produce than a dollar of output in Japan or western Europe. Gasoline taxes,
though they have the advantage of making energy consumers bear the
associated environmental costs - "internalising externalities" in the
language of economics - remain politically toxic. The Bush camp recently
attacked John Kerry for once supporting an energy tax.

Nonetheless, the onward march of energy-saving technology, the growth of the
weightless service sector relative to heavy manufacturing, and the
realisation that Opec - as well as the Internal Revenue Service - has plenty
of power to exact tribute from US consumers have combined to reduce the US's
economic vulnerability to an oil shock. Not only does each real dollar of
GDP take half as much energy to produce as before the oil embargo in 1973,
but, perhaps more surprisingly, the overall consumption of energy per capita
in the US has essentially been flat for the past 30 years. Sports utility
vehicles are less important to the economy than their dominance of suburban
driveways suggests.

One rule of thumb, used by the International Monetary Fund, is that a
sustained $10 per barrel rise in the oil price slices only 0.3 percentage
points off annual US GDP growth: not negligible, but not disastrous.
Yesterday's news of a thumping rise in retail sales in March suggests
consumers have not yet been knocked off their stride by higher pump prices.

The Federal Reserve, fortunately, is not about to cock its revolver for an
interest rate rise purely because of rising oil costs. If anything, higher
oil prices in current circumstances are likely to be disinflationary in the
medium term because they reduce real wages and profits - as the 4,000
workers soon to be laid off by DuPont because of rising energy prices can
testify. As the saying within the Fed goes, higher gasoline prices are a
roadside tax collector in cash. Unless inflationary expectations are rising,
there is no need to react to one-off changes in price caused by energy price
rises.

In the longer term, for both economic and strategic reasons, the US would be
wise to reduce its energy dependency. For now, unless oil prices accelerate
sharply upwards, it should be able to ride out the shock.

----

US spells out fears over rise in energy prices
By Stephen Schurr and Jennifer Hughes in New York
Financial Times, April 13 2004

US Treasury secretary John Snow spelled out the growing US concern about
rising energy prices yesterday, describing production cuts by the
Organisation of Petroleum Exporting Countries as "most unwelcome".

Gasoline futures hit an all-time high in New York after the International
Energy Agency raised its forecast for global oil demand for the sixth month
in a row.

Asked on radio about rising petrol prices, Mr Snow said: "We are very
concerned and the actions by Opec in reducing its quota are most unwelcome.
We have let Opec know that we don't think well of these actions. The
situation is a serious one."

The price of crude oil for May delivery rose 46 cents to $37.60 on the New
York Mercantile Exchange. Earlier in the session, the price touched $37.72,
the highest level since March 22.

Gasoline for May delivery reached $1.1790 a gallon, up 2.8 cents from
Thursday. Prices at the pump were just over $1.82 per gallon and are
expected to reach $2 this summer.

The IEA raised its demand projections on Friday, cautioning that the annual
spring slowdown in demand would be smaller than usual. The Paris-based
energy advisory group raised its second-quarter estimate of demand by
270,000 barrels a day to 78.3m b/d, 2.2m b/d more than the same quarter in
the previous year.

"The IEA is finally getting closer to reality -- they've been
under-forecasting demand for a long time," said Gary Ross, chief executive
of energy consultancy PIRA Energy Group. He added, however: "They are still
below the mark." Indeed, traders said the market's strong price move had
more to do with expectations that demand estimates would be revised higher
again.

"Every reporting agency continues to say, 'we've missed the mark on demand
expectations', said Phil Flynn, senior market analyst at Alaron Trading in
Chicago. "The speculators are betting on more revisions, and they have been
right all along."

Mr Flynn and other industry analysts say they expect the price of crude to
hit $40 a barrel.

Last month Opec agreed a 1m b/d cut in production to counter the effects of
any spring slowdown. But anecdotal reports suggest the high prices are
tempting leading exporters to produce over their quotas.

Increased supply has been far outstripped by surging demand, especially in
China. A report by the official Chinese news agency showed that imports rose
35.7 per cent year-on-year in the first quarter. Meanwhile, concerns about
instability in key oil-producing nations such as Iraq and Venezuela are
boosting prices.

The spectre of surging prices at the petrol pumps has raised some alarms
about the effect on the US economy. But Mr Ross said demand would remain
robust, adding that no American drivers would refrain from taking a 500-mile
vacation because "it costs an extra $7.50 at the gas pump".