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High oil prices add uncertainty to future world economy

(Xinhua)
Updated: 2008-01-04 22:47

For developed economies, the sub-prime mortgage crisis has triggered a lack of financial fluidity. To avoid further turbulence on the financial market, the US Federal Reserve (Fed) and the European Central Bank had to lower interest rates or stop raising interest rates in order to stimulate fluidity. However, high oil prices pose pressure for potential inflation, which will put western central banks in a dilemma on whether to increase or decrease interest rates.

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In spite of that, many analysts believe that a surging oil price now won't be as destructive to the world economy as in the past, as western economies such as the US have greatly reduced their reliance on oil in the last 30 years.

"The percentage (of personal income spent on energy) was far higher in 1979-80 than it is now," said Kay Smith, a macro-economist at the Energy Information Administration.

In 1981, 14 to 15 percent of the nation's gross domestic product was spent on energy, according to Lester Lave, professor of economics at Carnegie Mellon University's Tepper School of Business. That has fallen to seven percent today.

"So far, consumers have done an amazing job of ignoring high oil prices," said David Wyss, chief economist at Standard & Poor's.

The Daily Telegraph newspaper in Britain pointed out that in recent years the relationship between oil and the wider economy has been "out of whack" for some time. The ten-fold increase in oil prices in recent years has shown its lack of broader impact on the world economy, the paper said.

However analysts' opinions on the effect of surging oil prices on the global economy may differ, its psychological impact on global investors cannot be underestimated. On the New York Stock Exchange, the Dow Jones industrial average, the Standard & Poor's 500 Index, and the Nasdaq Composite Index all plunged on January 2, due to the upthrust of oil prices above the 100-dollar threshold. On January 4, the 225-issue Nikkei Stock Average on the Tokyo Stock Exchange also plummeted.

If investors' panic caused by high oil prices is difficult to erase, the global financial market may witness more turbulence in the new year, analysts fear.

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