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Daily Telegraph: Lebanon crisis could trigger deep recession, warns S&P

By Ambrose Evans-Pritchard

(Filed: 08/08/2006)

The price of crude soared to an all-time high of $78.54 a barrel in London after BP closed its Prudhoe Bay oil field in Alaska due to pipeline corrosion, cutting world supplies by 400,000 barrels a day.

The spike came amid warnings by Standard & Poor’s that crude could reach $250 if the Middle East crisis escalates, tipping the global economy into a deep recession.

The rating agency said the chief danger is a move by Iran to close the Straits of Hormuz – source of one fifth of the world’s oil needs.

Iran has threatened to block the shipping lanes if attacked by the West over its nuclear programme, or if Israel strikes at Syrian targets to halt the flow of weapons to Hizbollah in Lebanon.

Tehran has been developing the capability to close the Persian Gulf since the late-1980s, acquiring speedboats and sea-skimming missiles that could cause havoc to US warships.

“The Straits of Hormuz are only 21 miles wide,” said David Wyss, author of the S&P report. “The Iranians have the missiles to close it, and it would take US ground troops to knock them out.”

The growing fear is that Israel will hit Syria if Hizbollah starts to bombard Tel Aviv with their Iranian-supplied Zilzal missiles.

S&P said the world had so far managed to shake off the effects of higher energy prices but warned that the US in particular was becoming more vulnerable as higher interest rates squeeze the economy and over-stretched consumers reach the limits of debt.

“The fall-off in US growth means it takes a smaller shock to cause a recession than it did a year ago,” it said.

The report said the world economy would plunge into a recession as deep as the 1980-1982 downturn in the worst scenario.

American GDP would contract by 1.6pc in 2007, with unemployment jumping to 7pc and inflation reaching 10pc.

The crunch in Europe and Japan would be less drastic, but both would suffer comparable recessions. Russia would enjoy a huge windfall.

Jean-Michel Six, S&P’s Europe economist, said Britain would be relatively well cushioned as a financial centre with a much lower share of GDP derived from industry than in Germany.

“The City is a centre for the recycling of petrodollars so higher oil prices would not be entirely bad news,” he said. “Even so, Britain is now a net importer of oil, and so it too would be vulnerable to a shock. We’re a long way from the glory days when the UK was almost a member of Opec.”

S&P’s grim scenario is the worst of four possible outcomes sketched in the report released yesterday. The most benign is a calming of tensions, leading to a gentle slide in prices back down to $70 by the end of the year, and $60 in 2008.

The Middle East continues to supply the world with 31pc of its total production, much the same as in the last oil crisis of 1980.

US industry has become much more efficient, however, requiring 0.22 metric tonnes of oil per $1,000 of GDP, compared with 0.31 in 1980.

Kevin Norrish, oil strategist at Barclays Capital, said crude prices were likely to stay high, even if tensions subside, citing a slide in North Sea production and a slow recovery by rigs in the Gulf of Mexico. “The market remains very tight: China is importing more crude oil and US gasoline consumption is still rising, and so we forecast oil staying in the mid to low 70s,” he said.
 

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