Oil and Economy

Could the bad olddays of economic decline be about to return?Since OPEC agreed to supplycuts inMarch,the price of crude oil has jumped to almost $26 a barrel,up from

less than$10 lastDecember. This near-tripling of oil prices calls up scary memories of the 1973oil shock,when prices quadrupled,and 1979一1980,when they also almost

tripled.Bothprevious shocks resulted in double一digit inflation and global economic decline.So where are theheadlines warning of gloom and doom this time?

The oil price wasgiven another push up this week when Iraq suspended oilexports.Strengthening economic growth,at the same time as winter grips thenorthern

hemisphere,couldpush the price higher still in the short term.

Yet there are goodreasons to expect the economic consequences now to be less severe than in the1970s.In most countries the cost of crude oil now accounts for a smaller

share of the priceof petrol than it did in the 1970s.In Europe,taxes account for up tofour-fifths of the retail price,so even quite big changes in the price of crudeoil have a

more muted effect onpump prices than in the past.

Rich economies arealso less dependent on oil than they were,and so less sensitive to swings inthe oil price.Energy conservation,a shift to other fuels and a decline in the

importance of heavy,energy-intensive industries have reduced oil consumption.Software,consultancyand mobile telephones use far less oil than steel or car production.For

each dollar ofGDP(in constant prices)rich economies now use nearly 50%less oil than in1973.The OECD estimates in its latest Economic Outlook that,if oil pricesaveraged

$22 a barrel for afull year,compared with $13 in 1998,this would increase the oil import bill inrich economies by only 0.25-0.S%of GDP. That is less than one-quarter of the

income loss in 1974or 1980.On the other hand,oil-importing emerging economies一to which heavy industry has shifted一have become more energy一intensive,and socould

be more seriouslysqueezed.

One more reason notto lose sleep over the rise in oil prices is that,unlike the rises in the1970s,it has not occurred against the background of general commodity-price

inflation and globalexcess demand.A sizable portion of the world is only just emerging fromeconomic decline.The Economist's commodity price index is broadly

unchanging from ayear ago. In 1973 commodity prices jumped by 70%,and in 1979 by almost 30%.

The estimates inEconomic Outlook show that in rich countries______.

A.heavy industrybecomes more energy-intensive

B.income loss mainlyresults from fluctuating crude oil prices

C.manufacturingindustry has been seriously squeezed

D.oil price changeshave no significant impact on GDP