Impact of Federal Reserve's Decision to Cut Rates



    BOULDER, CO, Oct. 31 /CNW/ -

    Dr. Larry G. Chorn,
    Platts Chief Economist
    Platts Research and Analytics Group
    Boulder, Colorado

    The Federal Reserve announced its intent to lower interest rates today
following several weeks of contradictory economic information.  While the
equity markets appear strong, the overall economy appears to be experiencing a
gradual slowing as energy prices and credit liquidity concerns ripple across
markets.  As we suggested, following the last Federal Reserve meeting in
September, an unintended consequence of the 50 basis point decrease was indeed
a rise in oil prices.  Oil price benchmarks have surged beyond $90 per barrel
during recent trading sessions, driven by the precipitous decline in the
dollar relative to other major currencies and geopolitical disruptions between
Turkey and the Kurdish rebel group (PKK), renewed violence in Nigeria and a
pipeline attack in Mexico.
    The G7 countries met in Washington on Friday, Oct. 19, preceding IMF and
World Bank meetings over the weekend.  One of the primary topics discussed was
the revaluation of currencies and the rising price of oil.  That day oil spot
prices exceeded US$90 for the first time.
    The combination of adjustments in foreign exchange rates that will follow
this second U.S. interest rate decrease and rising oil prices is creating
challenges for many countries.  All oil-importing countries have seen their
energy bills rise since 2000.  Countries - such as European Union countries,
for example - whose currencies have appreciated relative to the dollar are
less affected.  Exporting countries, Canada and Russia in this grouping,
receive more dollars per barrel but may not be benefiting fully from the price
rise unless the majority of their foreign trade is conducted in U.S. dollars.
    The combined impact of rising oil prices and adjustments in foreign
exchange rates for the G7 countries, Russia and China are shown in the figure
below.
    
    (Photo:  http://www.newscom.com/cgi-bin/prnh/20071031/NYW145 )
    
    Changes in oil price and FX rates relative to the US dollar are graphed
for each country relative to price and rates as of Jan. 1, 2005.  Over this
two-and-three-quarter-year period, Japan, as an oil importer, has suffered the
greatest price impact of the G7, Russia and China.  Canada is experiencing the
most benefit of those shown here, based on rising oil prices and an
appreciating currency.
    The table shows the relative impact of rising oil prices on the G7
countries, Russia and China as of Oct. 16, 2007.

    
    Country         Relative   Price   FX Change(*)    FX      3-year     GDP
                    Oil        Rise    Relative to   Change  Average    Change
                    Price      Rank    US$ Since     Rank    GDP per    Rank
                    Rise Since         1/1/2005              Capita
                    1/1/2005                                 Change(xx)
                                                              (%)
    United States    1.992      6       1.000        N/A      2.63        4
    Canada           1.590      1       1.247          1      2.80        3
    G7 members of
     EU              1.866      5       1.052          5   1.74(xxx)        7
    Great Britain    1.841      4       1.068          4      2.57        5
    Japan            2.247      7       0.891          6      2.03        6
    Russia           1.793      2       1.114          2       6.7        2
    China            1.816      3       1.101          3      11.0        1
    
    (*)   Numbers greater than one reflect a currency appreciation relative to
the US dollar.
    
    (xx)  Source IMF.  2007 data estimated.
    
    (xxx) G7 members of EU GDP growth is weight-averaged using their
individual GDP each year.
    Dr. Larry G. Chorn is responsible for Platts forecasting and quantitative
analysis activities in the power, natural gas, coal and crude oil industries.
He joined Platts in July 2006 from the Colorado School of Mines (CSM), where
he served as Associate Professor of Petroleum Engineering, focusing his
research on project economics and risk quantification. In 2005, he was
appointed Director of the CSM Center for Petroleum Supply Studies.  Prior to
joining CSM, Dr. Chorn spent 25 years in the global oil and gas business,
working for ARCO and Mobil, and serving as an independent valuation and risk
consultant to more than 20 international oil and gas companies, including
Royal Dutch Shell, Lukoil, and Anadarko.  He has several refereed publications
and is a frequent speaker at technical and economic conferences. Dr. Chorn
earned his PhD in Chemical Engineering from the University of Illinois at
Urbana-Champaign.  He also holds an MBA in Finance and Strategy from Southern
Methodist University.
    
    About Platts:
    
    Platts, a division of The McGraw-Hill Companies (NYSE:   MHP), is a leading
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From 14 offices worldwide, Platts serves the oil, natural gas, electricity,
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http://www.mcgraw-hill.com.

    
    For More Information
    U.S.: Kathleen Tanzy
    212-904-2860
    Kathleen_tanzy@platts.com.
    

    
    Asia: Casey Yew
    +65 653 06552
    Casey_yew@platts.com
    

    
    Europe: Shiona Ramage
    +44 207 1766153
    Shiona_ramage@Platts.com
    




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