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'Oil Shock' Has Some Economists Worried

By Nell Henderson and Justin Blum
Washington Post Staff Writers
Friday, August 20, 2004; Page E01

Crude oil prices soared yesterday to nearly $49 a barrel, heightening concerns that sustained high energy costs could drag the slowing U.S. and world economies into a more serious downturn.

With growth slowing in China, Europe and Japan, some economists worry that rapidly escalating oil prices will trigger a self-reinforcing spiral of falling demand in the U.S. economy and among its trading partners.


Crude-oil traders work the floor of the Mercantile Exchange in New York yesterday. (Michelle Axelrod -- New York Mercantile Exchange/AP)

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"The economy is near its tipping point," Stephen S. Roach, chief economist for Morgan Stanley, said yesterday. He said the nation would likely fall back into recession if oil prices hover near $50 a barrel for three to six months.

"This is an oil shock, absolutely," Roach said, noting that yesterday's closing price was 68 percent higher than the roughly $29 per barrel average that had prevailed since early 2000. "The oil price is high enough to make a real difference to a vulnerable U.S and global economy."

Roach and other economists also agree that oil prices could reverse and fall suddenly if the market psychology changes, which would give a boost to the U.S. economy, and in turn the rest of the world.

Oil prices have been climbing for months because of rising global demand and fears that supplies could be disrupted by terrorist acts in the Middle East and a legal dispute involving Russia's largest oil producer.

But the pace has quickened in recent weeks as events that would command little notice in a calmer environment fed expectations of rising prices. They were then fanned higher by feverish speculation among traders in the oil markets.

Benchmark U.S. crude oil for September delivery closed at $48.70 on the New York Mercantile Exchange yesterday -- a record since trading began in 1983 -- after surpassing $47 per barrel the day before and exceeding $46 per barrel for the first time on Friday.

"The speculators have totally, totally run away with this market," said Fadel Gheit, senior energy analyst with Oppenheimer & Co. "It is no longer driven by any resemblance to sanity or fundamentals."

The markets have pushed prices higher in reaction to any report of a threat to production. Yesterday, for instance, some traders became alarmed at news that rebels set the offices of an Iraqi oil company on fire. But prices have not retreated significantly in reaction to news that bodes well for production, such as the relative calm that has been maintained during Venezuela's recent presidential recall referendum.


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