– Oil Crisis...is the world about to be shocked

World markets face 'severe consequences' of oil price
By Malcolm Moore, Economics Correspondent

The high cost of oil could hurt the global economy "more than is currently expected", the heads of the world's central banks warned yesterday, as crude prices broke new records.

Crude oil, which has risen 150pc in dollar terms in the past three years, was a major cause of concern at yesterday's annual meeting in Switzerland of the Bank for International Settlements, which is controlled by a coalition of central banks and helps oversee the world financial system.
 

At present, the world's supply of oil is only growing at one-third of the pace of demand.

The BIS forecast in its annual report that global economic growth would be 4pc this year but could be derailed if the oil price rises further.

Yesterday, benchmark Brent crude was up 55 cents a barrel to $58.91 in London. In New York, light crude for one-month delivery was trading close to $61 a barrel.

"Further rises - if they materialize - may have more severe consequences than currently anticipated. Recent signs of inflationary pressures in the United States underline these risks," said the BIS.

It added that in the light of lower economic growth, countries needed to adjust their spending and borrowing accordingly. "Everyone needs to commit to some unpleasant compromises now, in order to avoid even more unpleasant alternatives in the future," it said.

The price of oil has risen more than 15pc this month because of fears that refineries will be so busy distilling gasoline and diesel that they will not be able to make enough heating oil to meet demand over the winter.

Contracts to supply oil over the winter are now more than $60 a barrel in the UK, and $61 in the US, where demand has driven up prices in the UK to an average of 86.7p a litre for unleaded.

There are also supply problems, as non-Opec producers have struggled to pump enough crude. Russia, in particular, has seen its production growth fall.

At present, the world's supply of oil is only growing at one-third of the pace of demand, said Paul Horsnell, head of commodity research at Barclays Capital.

The vice governor of the central bank of Iran, whose new president has rattled the oil market with hardline comments, sought to calm the situation.

"In the short term we expect oil prices to remain around $60 a barrel, but if supply factors, demand and the geopolitical environment can be dealt with, expectations could come back to $40 a barrel," said MJ Mojarrad.

The governor of Argentina's central bank, Martin Redrado, said the bankers believed "we will have high oil prices for at least the next two or three years". Toshihiko Fukui, head of the Bank of Japan, said oil prices were "a relatively big problem".

Britain is particularly at risk if oil prices remain high. So far, the UK has been shielded by North Sea production. However, in the first quarter, the UK imported £15m more oil than it exported, and self-sufficiency will only last another four years.

The cost could be dramatic. In the last five years, daily North Sea oil production has dropped by about 700,000 barrels to 1.9m barrels. It would cost $15.3billion (£8.4billion) a year to import that amount at today's price.

Barclays Capital said "fresh highs" were likely since the market was "now pricing in the growing likelihood that oil demand will rise to a level that will severely stretch current capacity limits in both crude and refining later on this year."
 

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