Record high oil prices may hurt global economy

FRANCE, NIGERIA: The global economy could suffer as a result of world oil prices rocketing to record heights above 70.0 dollars per barrel, but analysts question the extent to which growth will be crimped.

Simmering tensions over Iran, the world's fourth-biggest crude producer, sent oil prices to historic peaks Tuesday above 72.0 dollars per barrel in London and close to 71.0 dollars in New York.

Traders believe further increases in the long term are likely owing to booming demand for oil from emerging economies such as China and India at a time when energy supplies are becoming tighter.

"Other things being equal, higher oil prices will mean weaker economic growth, but the question is weaker relative to what," said Capital Economics analyst Julian Jessop.

"If we had 70 dollars per barrel on oil prices in the midst of a recession, I would be very worried, but 70 dollars when the world economy is growing at over 4.0 percent is not such a big worry."

He added: "I'd rather have world growth of 5.0 percent and oil at 70 dollars, than world growth at 3.0 percent and oil at 50 dollars.

Meanwhile, the Organization of Petroleum Exporting Countries - whose second biggest member is Iran after kingpin Saudi Arabia - issued a warning over high oil prices on Tuesday.

"Sustained higher energy prices may pose a risk to growth, especially in economies where consumer budgets face pressure from rising interest rates," OPEC said in its monthly market report.

Earlier OPEC's president said oil would retreat from its record high if Iran's opponents stopped talking so tough over the Islamic republic's nuclear programme.

Edmund Daukoru, who is also Nigeria's oil minister, added that increased tension between Israel and the Palestinians was not helping matters.

"The current shoot up we are experiencing is as a result of the Iran problems and it's not helped by the flare up between Israel and the Palestinians," Daukoru told a news conference.

"But mainly it's the threatening statements being made against Iran as a result of its nuclear programme," he added.

Daukoru said a shortage of refineries to turn crude oil into products like gasoline and heating oil was behind a four-year rally that has taken oil from $20 to $72 a barrel and he predicted continued strength.

"The market will remain tight and will remain product-driven, not upstream-driven, for the next five years," he said.

When crude prices last hit historic peaks - after Hurricane Katrina devastated energy facilities on the US Gulf Coast in August last year - they contributed towards rising inflation, slower global economic growth and surging energy and gasoline (petrol) costs.

High crude prices increase the costs of most companies, weighing on oil-exposed stocks such as car manufacturers and airlines in particular, but at the same time they boost the profits of energy groups.

A sudden rise in the cost of consumer products and travel also takes a chunk out of household incomes, resulting in a fall in consumer spending.

British Airways said Tuesday that it is to increase the fuel surcharge on its tickets for longhaul flights after announcing that its fuel bill for 2006/2007 was expected to be 2.2 billion pounds (3.18 billion euros, 3.9 billion dollars) compared with a previous estimate of 2.0 billion pounds.

Record oil prices have also seen the price of gold climb above 600 dollars per ounce, the highest level for more than 25 years. Gold is seen as a store of value in troubled times.

Foreign exchange market analysts meanwhile said that a potential new conflict between Iran and the United States, alongside record oil prices, could weigh on the US currency.

"Rising oil and gasoline prices are negative for the dollar," said Derek Halpenny, currency economist at The Bank of Tokyo-Mitsubishi, who added that both contributed towards higher inflation.

"In addition, rising energy prices will continue to undermine the possibility of the US current account deficit coming under control," Halpenny said.

"With the deficit at 7.0 percent of GDP (gross domestic product), higher energy prices will ensure that this level rises further during 2006."

Last year the US current account deficit reached a record 804.9 billion dollars.

High energy costs account for about half of the deepening of the US deficit between 2001 and 2005, according to the International Monetary Fund.

The United States is relying on the huge dollar reserves held by Asian central banks and oil producing countries - nations with big current account surpluses - to finance its deficit.

Without them, the US currency would lose a crucial prop and could collapse.

Finance ministers from the powerful Group of Seven club of nations convene in Washington this week to tackle headaches posed by surging oil prices.

The G7 ministers will have in hand the IMF's latest analysis of the world economy, which is due to be released on Wednesday and is expected to predict solid global growth this year of about 5.0 percent.

However, the IMF has warned that high oil prices are a growing danger not just for global growth but also for the heavy imbalances they are creating in national finances, not least in the United States. Paris, Abuja, Wednesday, AFP, Reuters