Stagflation alert as oil soars
A SURGE in oil prices to near $US134 a barrel overnight combined with slowing US growth has raised fears the world’s biggest economy is headed towards a period of stagflation and rising unemployment, which could spread to Australia.
Oil struck new highs above $US133 a barrel overnight after the US Government reported unexpected declines in crude and petrol stocks in a market pressured by rising Chinese demand.
New York’s main oil futures contract, light sweet crude for July delivery, crossed $US130 for the first time then hours later raced to a record high of $US133.82 after the worrying US energy stockpiles report. The benchmark futures contract closed at $US133.17, which sent US stocks plummeting.
In Asian today, oil smashed past $US135 ($140) a barrel for the first time. New York’s main oil futures contract, light sweet crude for July delivery, rose to a high point of $US135.04 a barrel before easing to $US134.87 in morning trade.
The surge in prices will see petrol prices near $2 a litre in Australia with prices already above a record $1.60 in most capital cities.
Stagflation fears
The rapid surge in oil prices came as the US Federal Reserve slashed its 2008 growth forecast for the US economy, the world’s biggest oil consumer, raising the risk of stagflation in the US and around the globe.
Stagflation describes a period of inflation combined with slow economic growth and rising unemployment, possibly including recession – a description which some analysts say already describes the state of the US economy.
That would hurt other economies which export goods and services to the US such as China and Australia.
The US Fed overnight slashed its 2008 economic growth forecasts to a range of just 0.3 to 1.2 per cent, from its prior forecast of 1.3 to 2.0 per cent in January. The central bank cited higher oil prices as a key factor weighing on momentum.
Along with a higher oil price, analysts warn that US rate cuts could boost inflation and take the US economy closer to a state of ’stagflation’ by prompting more consumer spending. Lower US rates rates will also lead to more downward pressure on the US dollar, already at record lows, which would raise import prices.
Crude futures have soared by a third in value since the start of 2008, when they breached $US100 for the first time.
Oil prices are also surging because of a weak US dollar, which makes dollar-priced commodities cheaper for buyers using other currencies.
An already rallying oil market was galvanised by the US Department of Energy’s weekly snapshot of energy inventories, which unexpectedly showed declines.
The DoE report yesterday showed US crude oil stocks fell in the week ended May 16, by 5.4 million barrels to 320.4 million barrels. Most analysts’ had expected a build of 300,000.
Petrol inventories dropped by 800,000 barrels, to 209.4 million, confounding expectations of a gain of 250,000 barrels.
The petrol news was particularly market-sensitive, coming days ahead of the US summer-holiday driving season that kicks off this weekend for the Memorial Day holiday on Monday local time.
Americans have already begun buying less petrol as prices at the pump hit new highs. The change in driving habits is raising concerns about a slowdown in consumer spending, the main engine of the world’s biggest economy.
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