[Peakoil-announce] ASPO says Rudd must launch oil vulnerability taskforce

[Alex Pollard]

http://business.theage.com.au/record-oil-price-deepens-us-woes/20080103-
1k2k.html

Record oil price deepens US woes
January 4, 2008 

CRUDE oil futures have broken through the "psychological barrier" of $US100 
a barrel ($A113) for the first time, adding to economists' expectations 
that the US Federal Reserve will cut interest rates later this month in an 
attempt to avert recession.

West Texas crude oil for February delivery rose $US4 a barrel in New York 
yesterday morning to reach the $US100 mark following further violence in 
Nigeria. At least 12 people were killed in the oil city of Port Harcourt 
and already reduced daily oil production was hit again.

A further blow to confidence came with the new year's first economic 
indicator out of the US. The Institute for Supply Management's latest 
snapshot of US manufacturing activity showed it fell last month to its 
lowest level in almost five years.

Analysts had expected a steady economy with a reading of 50.5% but the 
index of factory activity fell to 47.7%, down 3.1 percentage points from 
November's result of 50.8%.

Traders on Wednesday night increased their bets on further interest rate 
cuts after the release of the minutes of the Federal Reserve's December 
meeting showed it believed the economic situation was "quite fluid and the 
economic outlook unusually uncertain" when it cut rates by a quarter 
percentage point.

The Fed next meets on January 30. In its past three meetings it has cut the 
target for the benchmark federal funds rate — the rate at which banks lend 
to each other overnight — by a total of 1 percentage point despite fears of 
increased inflation.

Shane Oliver, chief economist at AMP Capital Investors, said the tipping 
point for a US economic recession might be nearing.

"The problem for the US economy is that (the oil price) keeps going up," he 
said. "The oil price has been going up for years and hasn't yet brought on 
a recession but we are getting to a point where the US consumer is already 
very vulnerable given the slump in the housing market and this is another 
problem that they have to contend with.

"I think the Fed will have to cut (interest rates) because the deflationary 
effect of higher oil prices and the slowing US economy will overwhelm any 
inflationary impact."

Dr Oliver said he suspected speculators might have been attracted to try to 
push the oil price through the "psychological barrier of $US100 a barrel". 
It was a single trade on the New York Mercantile Exchange that drove the 
price to triple digits before it slipped back to just above $US99 a barrel.

"In the very short term it could go a little higher than that on the back 
of normal speculation but over the next six months it is likely to come 
down to mid-$US80s before it resumes its trend upwards," he said.

ANZ chief economist Saul Eslake said he remained optimistic that the US 
could avoid a recession in the short term.

"My view is that the next recession in the US will come in 2009-10 in 
response to rising interest rates that are imposed in order to prevent an 
unacceptable rise in inflation," he said.

"In the shorter term, though, I think there will be more rate cuts because 
I think the Fed is more concerned at the margin about the downside risks to 
growth in the short term than they are about the upside risks to inflation."

Economists do not expect the surge in oil prices to affect interest rates 
in Australia.

While opinions differ on whether the world is approaching or has reached 
peak oil production, the Australian Association for the Study of Peak Oil 
and Gas (ASPO) says the Rudd Government must launch an oil vulnerability 
taskforce to avoid experiencing "a petrol drought".

Elliot Fishman, a spokesman for ASPO, said the US should brace for a 
recession based on past experience.

"There has been a long history and a very consistent history of recession 
following the increase in the price of crude," he said. "I think it will 
send jitters through the market which will flow onto Australia. People here 
are likely to pay that little more at the petrol pump."

http://www.federalreserve.gov/