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Oil supply threatens world economy

London, (Guardian News Service): Fears that the world economy could be derailed by higher energy costs intensified on Wednesday night after the price of oil set fresh records on both sides of the Atlantic.

With petrol prices set to reach record levels within days the oil cartel Opec last night tried to soothe the market, saying it could - and would - pump more oil.

Brent futures leapt 35 cents to $40.99 a barrel, outstripping the previous high of $40.95 set in 1990 in the run up to the Gulf war.

In New York, US light crude prices set a record of $44.30 a barrel, the highest in 21 years of the New York Mercantile Exchange. Both contracts subsequently slipped back, but few analysts expect this to be the peak, with some saying that $50 oil is a possibility.

The German finance minister, Hans Eichel, said he was concerned about high oil prices. "It could slow world economic growth," he said.

Purnomo Yusgiantoro, the president of Opec, who had sparked price rises on Tuesday by saying the cartel could not pump more oil, tried to calm the market yesterday by saying that it could pump another 1m-1.5m barrels a day within weeks.

Prices have been driven higher each day of the past week, first as Russian oil giant Yukos said it faced bankruptcy and might have to cease pumping oil, then as the US announced a terror alert and, finally, by an attack on an Iraqi oil pipeline.

Economists have calculated that a $10 a barrel rise in oil prices knocks about 0.5 percentage points off world growth after 12 to 18 months. Brent has averaged around $25 a barrel in recent years, so a sustained price above $40 could knock the world economy hard.

"Oil prices matter enormously for the world economy and will continue to do so for at least our lifetimes," said Andrew Oswald, professor of economics at Warwick University, England

"A $15 a barrel rise, such as we have seen, will add one percentage point to unemployment in the US, for example."

COPYRIGHT: GUARDIAN NEWSPAPERS LIMITED 2004

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