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Crude Oil Price Hikes Throw Wrench Into Recovery
Local economists, business leaders observe the setback affects PR even more
BY KEN OLIVER-MENDEZ
April 11, 2002
The sharp, unexpected increases in crude oil prices in recent weeks have thrown another wrench into the process of economic recovery in Puerto Rico, according to local economists and business leaders.
"Its another black cloud hanging over our economic horizon," economist Heidi Calero told CARIBBEAN BUSINESS, on the same day she released results of a study on the economic damage the Calderon Administrations proposed 50% to 78% excise tax increases on beer and alcoholic beverages would inflict upon the local economy.
"Our earlier forecasts for recovery in the second half of 2002 didnt take increases of this magnitude into account," Calero added. Since mid-January, the price of crude oil has risen nearly $10 a barrel, from a low of just under $18 to around $28 a barrel at present.
"On an annualized basis, every $1 that the price of crude oil goes up represents a drain of about $75 million on Puerto Ricos economy," economist Jorge Freyre indicated.
Freyre noted that the island economy benefits more than the U.S. as a whole from low oil prices (which has a downside in oil-producing U.S. states), but suffers more than the rest of the U.S. from the effects of high prices due to its virtually complete dependence on oil as an energy source.
At present, 82% of Puerto Ricos electric power production is oil-fueled, but that number is projected to decrease to 65% by summer 2003 when the coal-fired AES co-generation plant comes on line.
In addition to adversely affecting the islands balance of payments, economist Ramon Cao says rising oil pricesfueled by heightened uncertainty in the Middle East in the wake of escalating Israeli-Palestinian violencealso mean that inflationary pressures are increasing. "Its increasing the costs of production again, causing both production capacity and real income to diminish."
As FirstBank President and CEO Angel Alvarez pointed out, one of the factors that had softened the impact of last years economic downturn was low oil prices. "Those savings at the gas pumps went directly into consumers pockets," Alvarez observed.
"At this stage of the recovery, we needed low oil prices," Westernbank President and CEO Frank Stipes said, agreeing with others that the increases have thrown a wrench into U.S. and island economys growth projections. On the upside, Stipes said the return of higher oil prices will probably induce the Federal Reserve to continue keeping interest rates lowno more than 50 to 75 basis points higherfor the remainder of the year.
This Caribbean Business article appears courtesy of Casiano Communications.