High oil prices threaten global instability: IMF


1 hour, 45 minutes ago

WASHINGTON (AFP) - High oil prices are storing up trouble for the world economy by creating serious imbalances in national finances, not least in the United States, the IMF warned.

The International Monetary Fund said much of the cash bonanza enjoyed by oil-exporting countries was being recycled into US markets, driving up the US current account deficit still further with resulting risks for all.

It said "the recycling of petrodollars through international capital markets is helping to keep interest rates low in the United States, thereby further fuelling the current account deficit by supporting consumption".

But the higher the US deficit goes, the greater the risk of the dollar crashing, "which would push US interest rates up sharply and possibly lead to a recession", the IMF warned.

The Fund's comments came in a pre-released chapter of its semi-annual World Economic Outlook, the rest of which comes out next Wednesday.

It said that higher oil prices accounted directly for about half of the deterioration in the US current account over the past two years.

The US current account deficit widened to a colossal new high of 804.9 billion dollars in 2005, reflecting high energy prices and a consumer binge on cheap imported goods.

In the fourth quarter of 2005, the deficit surged by 21.3 percent from the previous three months to a record 224.9 billion dollars. That amounted to an unprecedented 7.0 percent of gross domestic product ( GDP).

Oil prices have gone only higher since then, threatening to breach 70 dollars a barrel now owing to tight supplies and a crisis over the nuclear ambitions of major crude exporter Iran.

In the past, global imbalances from high oil prices have adjusted quickly as growth in energy importers such as the United States slows and inflation rises.

But this time, interest rates have stayed lower thanks to the benefits of globalisation and greater vigilance against inflation, while oil exporters are not spending their cash as freely as in the past.

"As a result, the oil price-induced imbalances are likely to be with us for some time," IMF chief economist Raghuram Rajan told reporters.

"This is in part a good thing. It suggests the market has more flexibility, there's more rope. But more rope can be used in many ways," he said.

The longer the imbalances persist, the IMF report warned, the greater "the risk of a sudden, disorderly adjustment".

Higher oil prices should depress economic growth in time, the IMF believes. It estimates that a 10-percent rise in crude prices reduces global growth by 0.1 to 0.5 percentage points.

David Robinson, the IMF's deputy head of research, said predicting oil prices was "fraught with uncertainty" but that all the signs point to prices staying elevated over the medium term.

That reflects low levels of excess capacity in oil producers, he said, adding that new investment is not happening "as fast as we would like to see given that demand in the world continues to increase".

"So I think we're looking at a period of continued, sustained high oil prices. But there is a lot of uncertainty."

The Fund urged both exporters and importers of oil to take action.

It said oil exporters were running up unsustainable current account surpluses, often exceeding 15 percent of GDP.

The exporters, most of which are developing countries, should spend wisely on education and infrastructure to reap permanent benefits. That "would be highly desirable" both for their own growth and for the global imbalances.

"For oil-consuming countries, the full pass-through of world oil prices into domestic energy prices to reduce oil consumption is needed," the IMF added.