by Jeremy Rifkin

The average nationwide price of a gallon of gasoline in America=20
reached a record high of
$1.77 this month. The steady spike in prices has left analysts=20
wondering if this is a harbinger of even more dramatic increases as=20
motorists head into the spring and summer months. Get ready for what=20
might become the economy's version of the perfect storm later this=20
summer. The devastation could quickly spread to the UK and the rest=20
of the world, with dire consequences for the global economy. The=20
first hint of what might be in store came last month when Opec=20
announced its decision to withdraw 1m barrels of crude oil a day from=20
the market. Opec is worried about the weakening value of the dollar:=20
it has lost one-third of its value in just under two years. Since=20
Opec sells oil for dollars, the oil- producing countries are losing=20
precious revenue as the value of the dollar continues to erode. And=20
because oil-producing countries then turn around and purchase much of=20
their goods and services from the EU and must pay in euros, their=20
purchasing power continues to deteriorate. (The euro is currently=20
valued at $1.23.)


How will the weaker dollar affect oil prices? Philip K Verleger, the=20
dean of US oil market analysts and a visiting fellow at the Institute=20
for International Economics, suggests that "oil-exporting countries=20
may decide to adjust their price band to reflect the falling value of=20
the dollar". If the dollar continues to slide, he warns, we could see=20
oil prices rising from the current $38.18 a barrel to a record high=20
of $40 by midsummer.


There are other dark clouds on the horizon. US crude oil inventories=20
are at the lowest point since the mid 70s, and the retail gasoline=20
market is operating with little reserve margin as we move into the=20
summer months, where more travel will increase demand. The dwindling=20
oil reserves are made worse by the White House decision to replenish=20
the strategic petroleum reserve, further reducing the amount of=20
gasoline available.


Verleger says gasoline could climb as high as $3.50 a gallon before=20
leveling off at $2 by the autumn. How high prices eventually soar=20
could depend on still other factors, including potential oil=20
disruptions in Venezuela and the Middle East. There is also the=20
prospect that one or two major refineries might fail during peak=20
demand this summer - not that unusual when increased consumer=20
pressure forces refineries to produce at peak capacity without taking=20
the time for proper maintenance.


Here is where events potentially begin to feed off each other,=20
creating the conditions for the perfect storm for the economy. If the=20
price of oil increases to $40 a barrel with an accompanying rise in=20
gasoline prices, the already weak economic recovery could stall.


How then do we lower the price of a barrel of oil? We'd have to=20
strengthen the value of the dollar so that Opec would not be forced=20
to raise prices to compensate for the deteriorating value of the=20
currency. But the dollar's value is declining because of America's=20
growing debt. The IMF is so concerned about US debt - the result of=20
rising budget deficits and trade imbalance - that it issued a report=20
warning that if steps weren't taken to reverse the trend, it could=20
threaten the financial stability of the world economy.


An ever-weaker dollar makes foreign investors less interested in=20
financing the mushrooming US debt. The US could raise interest rates,=20
making it more attractive for foreign investors, but that would mean=20
higher interest rates for US companies and consumers, which could=20
dampen the already weak recovery and send us back into a recession in=20
the US and around the world.


So we have all the conditions coming together to create the perfect=20
economic storm: record oil prices triggering a restriction in US=20
economic growth and an increase in the federal budget deficit,=20
accompanied by further erosion in the value of the dollar - with=20
increased budget deficits and the diminished value of the dollar=20
leading in turn to higher interest rates to convince foreign=20
investors to lend the US additional money, followed by a further=20
retraction of the US economy as rising interest rates lead to a drop=20
in domestic investment and consumption. The cascade of events touches=20
off a tsunami that engulfs the rest of the global economy, submerging=20
the world in deep recession.


As long as the US and global economy are increasingly dependent on an=20
ever-dwindling supply of oil from the Middle East, the conditions for=20
a perfect economic storm will continue to haunt us. The solution, in=20
the long run, is to wean the world off its dependency on oil. That=20
would require much tougher fuel efficiency standards, greater energy=20
conservation measures, support of hybrid vehicles and a switch to=20
renewable sources of energy. Short of that, expect the storm clouds=20
to gather in intensity.


=B7 Jeremy Rifkin is the author of 'The Hydrogen Economy' and president=20
of the Foundation on Economic Trends in Washington DC


=A9 Guardian Newspapers Limited 2004