Oil prices boil to new records

13 April 2012

A SUMMER of soaring oil prices is threatening to hit motorists and pile more pressure on the beleaguered manufacturing sector.

Light sweet crude hit a fresh record high of $59.18 a barrel in Far East markets today amid fears of future supply shortages and a lack of spare refinery capacity.

Analysts believe prices will reach further highs within days. 'We expect $60 to be breached in pretty short order,' said Kevin Norrish at Barclays Capital.

Experts warn this could cast a shadow over an economy already floundering as higher petrol prices bite into motorists' income and companies spend more on fuel.

Doug Godden, head of economic analysis at the CBI, said firms are getting concerned. 'Business is being squeezed,' he said.

'Not only is the oil price pushing up costs, weakening demand both at home and overseas is making it harder to pass them on.'

While oil is undoubtedly inflicting pain, comparisons with the price shocks of the 1970s and the crippling recessions that followed, are wide of the mark.

First, the increase in oil looks less worrying when you take inflation into account. If you adjust for changes in US inflation, oil needs to rise to about $80 to be as expensive today in real terms as it was in 1979. If you adjust for UK inflation, that figure is nearer $120.

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Another mitigating factor is that the economy is much less energy intensive than it was 30 years ago, while petrol is influenced more by Gordon Brown's fuel duties - some 75% of the pump price - than the vagaries of the oil market.

Steve Andrew, economist at F&C Asset Management, said: 'The economy has plenty more serious things to worry about than oil. Manufacturing's concerns about energy prices are swamped by worries about weak demand in the eurozone. However, in an economy where consumer spending is slowing, it is clearly not helpful.'

Royal Bank of Scotland's Ross Walker agreed. 'Recent experience has been that Britain has weathered the oil price rise relatively well.

'In itself it is not a major concern but, coming alongside the sharp slowdown in the domestic economy, it could be a bigger problem.'

Philip Shaw at Investec said an oil-induced slowdown in the US economy, which tends to be more sensitive to energy costs, could have a knock-on effect in Britain.

'We're getting into uncharted territory,' he said. 'If oil gets up to $65, it could hit the economy hard.'

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