Filling up a car in Cairo, Egypt: world oil markets are expected to remain under pressure, Johnson says. (Photo: Khaled Desouki/AFP)
Inflation warning
"Right now the oil market is tight and there isn't a lot of additional supply that can come on at very short notice and the market looks like it's going to remain under pressure for some time to come," Johnson said in an interview.
But he said that he expected increased crude supplies to eventually bring down prices. "Obviously, if there are supply disruptions or if some of the expected supply were not to materialize, this would push up oil prices. Personally, I think that there is going to be more of a supply response than people think," he stated.
"It's usually the case when you have a big surge in commodity prices that people initially throw up their hands and say, oh my goodness, the world is too small, there are too many people, there's too much competition for resources. But then technology finds a way and, of course, there are lots of people who can make money through exploration and through pulling more oil out."
Inflationary risks
He warned that higher crude prices could channel through into core inflation, particularly in emerging market countries. "There very much is a danger that higher energy prices and high food prices will feed through into what's called core inflation," Johnson said. "I don't see that happening right now in the United States. There are some worries about it in the euro zone, but I think mostly it's an issue actually for emerging markets.
"Of course the larger emerging markets, including India and China—but other countries as well—are increasingly what's driving growth at the global level. So if there's an inflation problem emerging there, it should be the case that the monetary and fiscal authorities act quickly to keep inflation down—and if they don't, then there's going to be more trouble for the global economy down the road. Right now though it remains to be seen exactly how they're going to play this one."
IMF First Deputy Managing Director John Lipsky warned in a recent speech that inflation had reemerged as a global challenge, in part reflecting the impact of higher energy and commodity prices." This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability that could undermine prospects for restoring the combination of solid growth and low inflation that prevailed earlier in this decade," Lipsky stated.
While the IMF has projected that world growth will slow to 3.7 percent in 2008 from 4.9 percent last year, Lipsky warned of the risk that global growth could weaken more than generally anticipated. Johnson said that the IMF will publish an update to its global forecast in late July.
Impact on the poor
Johnson said that higher fuel and food prices were also having an impact in the world's poorest countries, where the poorest sectors of society were being hit the hardest, Johnson pointed out. The IMF has been working with the United Nations and other agencies to help relieve the impact of high food prices on low-income countries.
IMF Managing Director Dominique Strauss-Kahn will attend a United Nations conference in Rome on June 3-5 to discuss a global reaction to the food crisis.
In a column in the June 2008 issue of the IMF's Finance & Development magazine, Johnson says that high oil and food prices are having a destabilizing effect on a slowing world economy.
He calls for policy changes to help address the commodity price issue. "We have built a global energy system with automatic destabilizers, and this is not a good idea," he says [watch video].
Comments on this article should be sent to imfsurvey@imf.org
