Posted on 5-8-2004

Oil Threat To Global Economy
by Ashley Seager, August 5, 2004, The Guardian

Fears that the world economy could be derailed by higher energy costs
intensified last night after the price of oil set fresh records on both
sides of the Atlantic.

With petrol prices set to reach record levels within days, the chancellor,
Gordon Brown, was said to be monitoring the situation from his holiday in
Scotland. Oil cartel Opec last night tried to soothe the market, saying it
could - and would - pump more oil.

Brent futures leapt 35 cents to $40.99 (£22.50) a barrel, outstripping the
previous high of $40.95 set in 1990 in the runup to the Gulf war. In New
York, US light crude prices set a record of $44.30 a barrel, the highest
in 21 years of the New York Mercantile Exchange. Both contracts
subsequently slipped back, but few analysts expect this to be the peak,
with some saying that $50 oil is a possibility.

Motoring organisations reacted swiftly, warning of big price rises at the
pumps. "That is some move. This is markets in mid-summer madness mood. If
oil prices stay at these levels, we could potentially see another 4p-5p on
a litre very soon. It does not look good," said Ray Holloway of the Petrol
Retailers Association.

Petrol prices have risen from about 75p a litre at the start of the year
to about 82p now. When the latest oil price rise feeds through to the
pumps in a week or so, petrol will cost more than 85p, the price that
prompted the fuel protests of September 2000. Although oil prices have
risen by a third this year, petrol prices have risen far less sharply
because about 85% of the pump price is accounted for by tax and only about
15% by oil prices.

Treasury officials said Mr Brown remained concerned that enough oil be
pumped to meet record world demand. "With the UK and world economy
strengthening, we must continue to be vigilant to the risks. It is
important for the world economy that we maintain the pressure on all oil
producing nations to take the action required to reduce prices to a
sustainable level," said a Treasury spokesman.

Last month, Mr Brown postponed a 1.42p rise in petrol duty originally
scheduled for September, saying he would review it in his pre-budget
report in November or December. The spokesman said that remained his
position.

The German finance minister, Hans Eichel, said he, too, was concerned
about high oil prices. "It could slow world economic growth," he said.

Purnomo Yusgiantoro, the president of Opec, who had sparked price rises on
Tuesday by saying the cartel could not pump more oil, tried to calm the
market yesterday by saying that it could pump another 1m-1.5m barrels a
day within weeks.

But, despite Opec's reassurance, the Freight Transport Association called
on Mr Brown to cut fuel duties on diesel to help truckers through a
difficult period.

Prices have been driven higher each day of the past week, first as Russian
oil giant Yukos said it faced bankruptcy and might have to cease pumping
oil, then as the US announced a terror alert and, finally, by an attack on
an Iraqi oil pipeline.

Economists have calculated that a $10 a barrel rise in oil prices knocks
about 0.5 percentage points off world growth after 12 to 18 months. Brent
has averaged around $25 a barrel in recent years, so a sustained price
above $40 could knock the world economy hard. "Oil prices matter
enormously for the world economy and will continue to do so for at least
our lifetimes," said Andrew Oswald, professor of economics at Warwick
University. "A $15 a barrel rise, such as we have seen, will add one
percentage point to unemployment in the US, for example."