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High Oil Prices Create Fears of Slower Growth in US Economy - 2004-08-16

The world economy this year is expanding at its fastest pace in a decade. But the sharp rise in oil prices is causing some experts to scale back their growth forecasts.

The International Monetary Fund says the world economy will expand by 4.5 percent this year. But the forecast could be downgraded because of the depressing impact of higher oil prices, particularly in East Asia and North America.

The U.S. economy is already feeling the impact of higher priced oil with growth slowing during June and July. The Federal Reserve is expecting an economic rebound to four-percent growth in the second half of the year. However, Bill Dudley, chief economist at Goldman Sachs in New York, does not share that optimism.

"I think the economy is going to do okay. But I do not agree with the Fed's forecast that the economy is going to do better in the second half of the year than in the first," he said. "I just don't see how you get there."

Mr. Dudley believes growth will be restrained not just by higher priced oil but by the lack of fiscal stimulus that earlier this year came from tax cuts and higher government spending.

Barton Biggs, an investment manager in New York, agrees that the economy is going through a difficult period that is likely to last for some months. Mr. Biggs thinks speculation and fear of terrorism has sent oil prices to unrealistically high levels.

"I think we have a bubble in oil prices. Oil, like almost everything else in the world, is mean reverting (drifting back to its trend price over the past decade) and inventories are building," he said. "Substitution will occur. Innovation is bound to happen. So I think we're seeing a peak in oil prices right about now."

The IMF forecast released four months ago predicted oil prices would average $32 a barrel this year. On Monday oil retreated slightly from its record high but still trades at $46 a barrel. The 33 percent increase in oil this year has sent world stock markets to their lowest levels in 12 months. The oil price rise is believed to be having its most significant impact in oil dependent Asia, where this year, growth had accelerated in Japan and held steady at high levels in China.