Quotes of the Day

Crude oil is the single most important raw material for the chemical industry. So when oil prices rise sharply—as they have over the past few months—chemical companies usually feel the pinch hardest. But when the big German chemical firm Degussa announced its earnings last month, the news was far from gloomy. Heinz-Joachim Wagner, Degussa's chief financial officer, calculated that the firm's raw-material costs had risen by more than a third over the past 18 months. Still, sales and earnings were up in the first half of this year and Wagner says he expects the trend to continue for the whole of 2005. A key reason: "We've been able to raise prices."

Now multiply that scenario across the thousands of European businesses dependent on crude oil, which hit a record $68 per bbl. last week and is up over 40% in the past six months. The result should be an inflationary spiral like the one that followed the oil shock of the mid-1970s, right? Not quite. For much of Europe, inflation remains muted; French consumer prices actually dropped in July. And the overall economic outlook seems to be improving in some places, most notably in Germany, Europe's biggest economy.

So is the soaring price of oil irrelevant? No, but this oil crisis is different. When OPEC choked off supplies in the 1970s and '80s, it set off a vicious circle of inflation, soaring interest rates and economic decline. But this time, oil prices are rising for the opposite reason: a big growth in demand, particularly from China, rather than a curtailing of supply. In addition, developed countries have generally reduced their dependence on oil as services have replaced manufacturing, while central banks have become smarter about nipping inflation in the bud. And critically, China's status as the low-cost workshop of the world helps lower prices—and keeps them down—for everything from underwear to DVD players. "If you had asked two years ago where the economy would be if oil hit $65 a barrel, we would have been far less upbeat than we are today," says Mark Wall, a London-based European economist for Deutsche Bank.

Despite record-high oil prices, most economists expect the world economy to grow by at least 4% this year. While that's down from last year's stellar 5% growth, it's more than double the euro zone's growth rate and is enabling companies such as Degussa and its German competitors to raise prices and offset more than j1 billion in extra raw-material costs. "High oil prices certainly still matter, but probably only half as much as they did 15 to 20 years ago," says Kenneth Rogoff, former chief economist at the International Monetary Fund (IMF), who now teaches at Harvard. He says that a $15 per bbl. increase in the price of oil 10 years ago, if sustained for a year, would have cut growth in Europe and the U.S. by about 1%. Now it amounts to a cut half that size. "In today's booming global economy," Rogoff says, "this means that 2005 is only going to be a very good year for global growth, rather than the spectacular one it might have been but for oil prices."

Not everyone is so relaxed. "We are running dangerously short of oxygen," warns Roger King, chief executive of Britain's Road Haulage Association, which is lobbying the government for a fuel-tax break for truckers. European motorists and airline passengers are also feeling the effect. Moreover, at least some economies are showing signs of incipient inflation. Consumer prices in the U.S. rose 0.5% in July, the biggest rise in three months, and the annual rate of inflation in Britain rose to 2.3% in July, from 2% in June.

The longer oil prices continue to climb, the greater the inflationary pressures will become. Rodrigo de Rato, the IMF's managing director, said last week that if high oil prices persist, "the impact on Asian growth will be considerable." Degussa's Wagner also warns that his forecast of continued profit growth depends on the stabilizing of raw-material prices. "There's tremendous uncertainty," says Deutsche Bank's Wall. For the moment, though, Europe's business executives, policymakers and central bankers are sitting tight, hoping their luck isn't about to change.

• Peter Gumbel
• Oil prices are hitting record highs. So why aren't Europe's economies feeling the inflationary crunch?