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The Guardian: Fears of £1 a litre for petrol as world prices reach high

The Guardian (UK): Fears of £1 a litre for petrol as world prices reach high

Increased demand and repercussions from Saudi Arabia and Iran hit markets: “Vince Cable, the Liberal Democrat Treasury spokesman and a former economist at Shell, believes that all the talk of the $100 barrel of oil is alarmist.”

Wednesday Aug 10, 2005

ASHLEY SEAGER

Petrol prices at the pump set yet another record yesterday after world oil prices touched an all-time high for the second day running. Analysts said pounds 1 a litre for petrol and even more for diesel was now a possibility but added that it was likely oil prices would fall back again in the autumn.

US light crude futures set a fresh record of $64.37 yesterday while Brent futures hit an all-time high of $63.70. Both were pushed higher by threats of attacks in Saudi Arabia, the world’s biggest oil exporter, and by jitters about the resumption by Iran, Opec’s second largest oil producer, of its nuclear programme.

But after the records were set in early dealings, prices retreated by 30-40 cents a barrel, bringing respite to a red-hot market.

Oil prices have jumped by more than 100% in the past year and a half, driven by strong demand from the US and Chinese economies. World oil demand grew at its strongest pace in 30 years last year at a time when oil supplies were close to their limit, with little spare capacity.

The market has also been supported by a lack of adequate refinery capacity in the US, which consumes a quarter of the world’s petrol. And in the past week or more, several US refineries have suffered production problems, adding to the squeeze on the market.

Petrol, or gasoline, prices, hit a record in the US yesterday, of $2.35 a US gallon, equivalent to around 34p a litre, a third of British levels.

Some analysts say the continued strong demand and lack of new supply in world oil markets could combine to push oil prices up to $80 or even $100 a barrel, pulling petrol prices well above the pounds 1 a litre level and potentially pushing the whole economy into recession. Many economists already attribute some of the slowdown in the British economy to the effects of dearer energy.

Futures markets are pricing oil as remaining in the mid-$60s a barrel throughout next year. But others, such as Ray Holloway of the Petrol Retailers’ Association, believe that lower petrol prices could be around the corner as the US motoring season comes to an end.

“This latest spike has been caused by strong US demand and a couple of refinery problems there,” he said. “But give it another 10 days or so and prices should be coming down again.

“My feeling is that crude will settle back down into the $50-$55 range fairly soon.”

Vince Cable, the Liberal Democrat Treasury spokesman and a former economist at Shell, believes that all the talk of the $100 barrel of oil is alarmist.

For one thing, he says, high oil prices will lead to increased production and exploration, thereby improving supply, and to falling demand, as consuming economies slow in the face of higher energy costs. “It seems clear that increased supplies, and capacity, and slowing demand will reverse the market trend before long, possibly very sharply,” he wrote in the Guardian this week.

The remarkable thing is, say analysts, is that inflation in the advanced economies has remained remarkably low in the face of surging oil prices. Britain’s inflation is running at 2%, whereas it jumped to more than 20% during the 1970s oil price shocks.

This is partly because western economies use oil less intensively than in the past and so are better able to absorb higher oil prices. Also important is that the current rise in oil prices is driven by strong demand rather than an interruption to Middle East oil supplies, as happened in 1974 and 1979. Oil prices in 1979 hit $80 a barrel in the equivalent of today’s money, well above the $64 a barrel level.

But Stephen Lewis, an economist at Monument Securities in the City, said this did not mean the economy was not vulnerable to the rising cost of energy. “Oil demand is proving less elastic with respect to price than it was in the 1970s,” he said. “This reflects the fact that there is less scope for economising in oil usage now than there was then.”

http://www.guardian.co.uk/business/story/0,,1545899,00.html

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