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Oil is hitting new highs after a US government report showed strong fuel demand in the world's top oil consumer. Prices also drew support from international tensions ranging from Iran's nuclear ambitions to North Korea's missile tests. Adjusted for inflation, oil is more expensive now than at anytime since 1980, the year after the Iranian revolution. A look at how oil is affecting economies, and what's in store for nations. With headlines tracking the ever-rising price of oil, the lack of any major effect of the shock on global growth has become the subject of discussion and speculation. Experts say an oil price rise on the international market may pose a potential threat to world's economy. At present, the global oil demand reached about 82 million barrels a day and will continue to increase in coming years. Meanwhile, the supply remained at almost the same level of demand and put the demand of supply at a fragile balance which can be easily shattered by any bad news in the world oil market, thus pushing the oil prices upward continuously. Same as in the past years, the high oil
prices resulted from several reasons such as the strong demand, the
geopolitical uncertainties and the low excess oil production capacity. The
soaring oil prices resulted mainly from strong recovery of the world
economy beginning from three years ago, leading to a rising demand for oil
and there are increasing worries on the lack of enough oil supply in the
future. Lack of enough excess oil production capacity is another big problem facing the world oil market and is one of the main reasons in pushing the prices higher and higher recently. The amount of excess oil production available in the Organization of Petroleum Exporting Countries (OPEC) is around 1 million barrels a day, only about 1 percent of the world oil demand, according to many analysts. At the same time, the high oil prices have not seriously hindered the pace of world economic growth and the economy has been increasing strongly in the past two years and is expected to march forward in a quick pace. These features of the global oil scenario have two implications. First, it is likely that prices are likely to remain high for some time to come even if the era of cheap oil is not altogether over. Second, as and when specific developments threaten to affect or actually do affect oil supplies from any existing location, a further spike in oil prices is a real possibility. But already there are signs that things may change. To start with, not all countries are in a position to cope with the current price of oil. Many poor countries cannot access foreign credits with the ease that characterises the more developed even among the developing. But that is not all. Even some of the more developed countries in developing Asia have been badly affected in 2005, when prices have continued to rise and the discount on the West Asian varieties they import has fallen sharply. Asia, which imports 70 per cent of its oil from the Middle East, has received a larger oil shock this year than last. Countries are finding it increasingly difficult to maintain retail fuel subsidies. Thailand abandoned subsidies, while other governments, such as India's, have raised prices despite opposition. In the event growth and oil demand are likely to fall. Thus the hike in oil prices is bound to have an adverse effect on the global system soon. What is not certain is the nature and location of that adverse effect. Fears of a global recession arise because the already high US trade deficit is widening sharply. Clearly, if prices rise further, global growth could indeed stall. However, that projection hinges on the perceived trade-off between growth and inflation, and is predicated on the assumption that oil prices increases will lead to more general inflation. Governments attempting to combat inflation will then embark upon contractionary fiscal and monetary policies, which will bring down inflation but also imply lower rates of aggregate economic growth.
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