Oil price boom threat to economy

WE'RE already paying the price at the fuel pumps. But what will happen to the economy at large if the crude oil price keeps going up?

High oil prices can cause recession but if there is one it's likely to be less of a shock than was inflicted in the 1970s. Then, a sudden leap in the oil price caused by Middle East countries' decision to restrict supplies in the wake of the 1973 Arab-Israeli war sparked a global recession.

Nevertheless, the Bank of England is likely to view the high oil price with some concern as it assesses the country's economic indicators in order to set base rates.

The Bank has to walk a tightrope. Having already increased rates three times it is struggling to slow the runaway housing market and to get consumers to rein in their spending.

A sharp rise in the price of fuel could do both these things for it relatively quickly and the Bank is anxious not to see this tip the economy into full-scale recession.

Consumer restraint could come fairly soon though Britons seem currently resigned to the higher fuel costs. Unlike September 2000, when protests at Government fuel tax rises nearly brought the country to a standstill, there are fewer signs of public disquiet this time.

That's mostly because the high oil price is not due to any new Labour duty on fuel, but to political instability in the Middle East.

Moreover, rapid global economic expansion, particularly in China, has increased demand for oil and the price has risen accordingly.

But it's the deteriorating situation in Iraq, which has the second-largest oil reserves in the Middle East after Saudi Arabia, that underlies fears about the region's ability to keep the oil flowing.

Saudi Arabia has already called on fellow members of Opec, the oil producers' cartel, to increase output to prevent oil prices stalling the global economy. This hasn't dampened the oil price yet - crude topped $41.65 a barrel today, a 21-year high and the likelihood is it will remain high for some time.

Whatever the causes, as consumers we're already paying the price. Fuel pump prices are going up and many can expect their holidays to cost them more as airlines slap surcharges on to the price of their tickets.

Uncertainty will also impact confidence in the City where concern over the oil price will also hit share prices across different industry sectors, but particularly aviation, chemicals and plastics and distribution.

Higher distribution costs will in due course feed through to higher retail prices as retailers look to pass on their increased costs.

Opec members meet later this week to decide on production levels and that could see the first concerted action to restrain the soaring oil price.

But, as Algerian energy minister Chakib Khelil points out, even if Opec does increase production, it won't have much impact on the price because the rises have less to do with supply problems than with political instability.

'I have always said that Opec has always satisfied the needs of the international market and that the price rises on the world market are not at all due to a shortfall in supply.

'The rise in barrel prices is much more linked to geopolitical problems, to speculation, to the rigidity of the US market, to the US fuel refinery and distribution system.'

Khelil added: 'It is political tensions and market perceptions of what lies in the weeks and months ahead that are strongly affecting the rise in oil prices.'

City analysts warn that we could be in for a bumpy ride over the summer.