Much of the cash bonanza enjoyed by oil-exporting countries is being recycled into US markets, the International Monetary Fund says, and that is driving up the US current account deficit still further with resulting risks for all.

The fund's warning, contained in a document released ahead of next Wednesday's publication of its twice-yearly World Economic Outlook, goes on to say that "the recycling of petrodollars through international capital markets is helping to keep interest rates low in the United States, thereby further fueling the current account deficit by supporting consumption."

ADVERTISEMENT

But the higher the US deficit goes, the greater the risk of the dollar crashing, "which would push US interest rates up sharply and possibly lead to a recession."

It says that higher oil prices accounted directly for about half of the deterioration in the US current account over the past two years.

The US current account deficit widened to a colossal new high of US$804.9 billion (HK$6.27 trillion) in 2005, reflecting high energy prices and a consumer binge on cheap imported goods.

Brent crude breached US$70 a barrel Thursday owing to tight supplies and a crisis over the nuclear ambitions of major crude exporter Iran.

In the past, global imbalances from high oil prices have adjusted quickly as growth in energy importers such as the United States slows and inflation rises. But this time, interest rates have stayed lower because of globalization and greater vigilance against inflation, while oil exporters are not spending their cash as freely as in the past.

"As a result, the oil price-induced imbalances are likely to be with us for some time," said IMF chief economist Raghuram Rajan in Washington.

"This is in part a good thing," he said. "It suggests the market has more flexibility, there's more rope. But more rope can be used in many ways."

The longer the imbalances persist, the IMF report says, the greater "the risk of a sudden, disorderly adjustment."

Higher oil prices will depress economic growth, the IMF believes. It estimates that a 10 percent rise in crude prices reduces global growth by 0.1 to 0.5 percentage points.

David Robinson, the IMF's deputy head of research, said predicting oil prices was "fraught with uncertainty" but that all the signs point to prices staying elevated over the medium term.

That reflects low levels of excess capacity in oil producers, he said, adding that new investment is not happening "as fast as we would like to see given that demand in the world continues to increase. So I think we're looking at a period of continued, sustained high oil prices. But there is a lot of uncertainty."

The fund is urging exporters and importers of oil to take action.

It says oil exporters are running up unsustainable current account surpluses, often exceeding 15 percent of GDP.

The exporters - most of them developing countries - should spend wisely on education and infrastructure to reap permanent benefits. That "would be highly desirable" for their own growth and for the global imbalances.

"For oil-consuming countries, the full pass-through of world oil prices into domestic energy prices to reduce oil consumption is needed," the IMF adds. AGENCE FRANCE-PRESSE