The Times: Oil at $100 threatens to choke economy

January 3, 2008
Patrick Hosking, Banking and Finance Editor and Steve Hawkes

The price of crude oil soared to $100 per barrel for the first time yesterday in a trend that could feed through into higher petrol prices and delay an early cut in interest rates this year.

Aggressive buying by speculators, cold weather in the northern hemisphere and the falling US dollar helped to propel the price of oil to a record on the Nymex exchange in New York.

Crude oil — the raw material for petrol, diesel and heating oil and a major component in the manufacture of plastics and packaging — is a major determinant of costs for businesses.

A rise in the price of crude, as well as feeding through into fuel prices at the pumps, is likely to be inflationary and could slow the speed at which the Bank of England is able to cut the base rate this year. Mike Lenhoff, chief strategist at the stockbrokers Brewin Dolphin, said: “This will push up headline inflation. That will make it more difficult for the Bank of England to cut interest rates.”

The increase to $100 — which is also a psychological benchmark — adds to the growing signs of pressure on consumers. British Gas recently said that higher gas prices meant that bills for its 10 million customers might have to rise, while food inflation is threatening to push up the cost of the weekly trip to the supermarket.

The price of US light crude rose $4.02 to $100, with Brent crude, the British benchmark price, soaring above $98 per barrel for the first time. The cost of crude oil has tripled in the past four years on booming demand from fastgrowing Asian economies.

Yesterday’s increase recalled the economic crisis after the Iran-Iraq war when oil hit $36.83 per barrel, equivalent to $90.46 today. The all-time inflation- adjusted high of $101.70 was reached after the Iranian revolution in April 1980. Analysts said yesterday that the lack of investment in bringing more production on stream around the world, coupled with political tension in the Africa and the Middle East, meant that oil prices were likely to remain high.

The AA has revealed that petrol prices rose to a record 103.3p per litre for unleaded on New Year’s Day. It now costs a motorist £7.36 more to fill up the typical 50-litre petrol tank than a year ago.

Paul Watters, the head of AA public affairs, said it was vital that the Government delayed a planned near 2p per litre increase in the petrol duty this April. He told The Times: “We have never started a new year with petrol prices this high.”

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3123867.ece

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