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Warning on high global oil prices

By Xin Zhiming (China Daily)
Updated: 2008-06-24 10:38

World Bank economists yesterday warned global oil prices would not drop significantly in the coming months but said China has been successful in controlling inflation.

"You don't expect oil prices to come down sharply," said Hans Timmer, lead economist and manager of the Global Trends team of the World Bank.

In the Bank's Global Development Finance report released this month, it forecast oil prices could average $108 a barrel this year before dropping to $105.5 and $98.5 a barrel next year and in 2010.

Oil prices hovered around $136 a barrel yesterday. Timmer said the forecast could be inaccurate because of the volatility of oil prices. "It's incredibly difficult to forecast oil prices in the current circumstances and there are upside risks for the forecast."

The current problem is "disappointment" in the supply side, Timmer said. "The reasons for the rising oil prices are fundamentals, not speculation."

Producers outside the OPEC have failed to increase output while OPEC, which produces about 40 percent of the world's output, even reduced production last year, Timmer said.

The solution to this problem lies in changes in the overall policy as well as improvement in energy efficiency, the economist said, pointing out that China's move last week to raise oil product prices is in the "right" direction.

Many analysts, however, warned that it may exacerbate the country's inflation, which was 7.7 percent year-on-year in May, down from 8.5 percent in April. Although May inflation was down, it is still significantly higher than the official target of 4.8 percent for this year. Economists generally forecast the whole-year figure could be above 7 percent.

Moreover, the May producer price index, which measures factory-gate inflation and largely reflects the consumer inflation trend, rose 8.2 percent, the highest in more than three years.

Timmer said Chinese policymakers must prevent oil-induced inflation from spreading to other sectors and triggering new bouts of price rises - the so-called "second-round effect".

Louis Kuijs, senior economist of the World Bank Beijing office, said China's tight monetary policy has been successful in containing the spillover of commodity-driven price rises into a more generalized inflation.