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The Business Online: Warning: oil will hit $85 a barrel this year

Warning: oil will hit $85 a barrel this year

By Allister Heath
23 April 2006

THE price of oil will hit $85 (E68.8, £47.6) by the end of the year, threatening an economic slowdown and pushing up the price of petrol at the pumps to more than £1 a litre, economists are warning this weekend.

The surging price will be caused by continuing buoyant demand caused by strong economic growth in Asia and across the world; as well as by rising tensions in Iran, Iraq and Nigeria.

The growing likelihood of a further rise in the price of oil was revealed in a poll by research house Ideaglobal this weekend. The average view was a peak of $85 a barrel this year but at least one respondent said the price of oil could go even higher to reach $90.

The poll follows another surge in the price on Friday. The June futures contract for crude-oil rose above $75 per barrel on the New York Mercantile Exchange, reaching a new high in nominal terms.

Prices jumped after US energy secretary Samuel Bodman warned that changes in specifications for petrol may cause brief shortages heading into the summer driving season.

Leading multinational companies are pushing through drastic improvements to their procedures to boost efficiency and reduce their need for oil.

The International Air Transport Association says efficiency improvements worldwide mean the industry would break even with oil priced at $48 a barrel in 2005, against $22 a barrel in 2003.

The soaring price of oil has so far not affected the performance of the US economy, which is expected to have grown by a buoyant 4.9% in the first quarter when early official estimates of the figures are released this week.

After adjusting for inflation, the price of oil reached a record of $97.55 in April 1980. But the current surge in the price of oil is also going hand in hand with strong price rises in other commodities and precious metals.

The price of gold bounced back to $635 an ounce in New York on Friday. Strong commodity price increases have fuelled fears of increased price pressures or at least diminishing corporate margins.

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