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Will Petrol Prices Continue On The Up And Up?

Be prepared for steeper petrol prices, already up 25 percent this year, before Christmas. Higher inflation, fuel surcharges on plane tickets, and higher costs for products ranging from plastic goods to higher transport costs are predicted. John Howard reports.

The yearlong price surge that pushed crude oil to its highest level since the 1991 Gulf War has so far been but a small bump in the path of global economic growth.

But that's likely to change very soon. On Thursday oil rose as high as US$26.80 a barrel on the New York Mercantile Exchange, the costliest since January 1991, when war in the Persian Gulf drove it to US$32. Thursday's profit taking pushed it back to US$25.80 for the day.

But analyst's are talking about the possibility of US$30 a barrel prices by year's end.

"Those four wheel drives (SUV's) are going to be pretty expensive to run," said John Kilduff, senior vice president of energy risk management for Fimat USA, a New York futures brokerage firm.

If oil's rise doesn't end soon, experts say, the overall inflation rate will begin to accelerate. That could prompt the Central Banks to impose another interest rate increase.

A interest rate hike, while it will curb inflation, would also slow down global economic growth, jeopardising corporate profits, jobs and the stock market.

It would reverberate around the world where some regions such as Asia are still recovering from severe recession.

No-one is forecasting oil will approach the all-time high of US$40.42 a barrel of October 11, 1990, just after Iraq's invasion of Kuwait. But "there's cause for concern" said Leo Drollas, chief economist for the Centre for Global Energy Studies, a London think tank.

"We've been blessed by low inflation, which has helped the Asian recovery and kept the US economy booming. And inflation is edging up, for other reasons as well. This is just giving it a kick when it's not needed," he said.

Oil's price runup took off last March when OPEC and key allies, disconcerted by plummeting prices and a world glut, cut production by 2.1 million barrels a day - 2.6 percent of world totals.

Except for a small dip, the price rise has continued unabated as OPEC members have largely adhered to the lower production levels. Now they are likely to extend the agreed lower production levels past the March 2000 deadline.

With global crude oil inventories near a two-year low, OPEC is still largely complying with the production cutbacks. With the arrival of colder weather in the northern hemisphere, which increases demand, analyst's say there is no end in sight to oil's rise.

This latest spike will be more noticeable in the coming weeks as global petrol companies, retailers, airlines and transporters pass along the higher costs to consumers.

"We'll probably have a good six months or so of inflated energy prices that will have to be dealt with, Drollas said.

Western governments, worried that the decline in oil stocks leave them more vulnerable to market swings, hope OPEC nations grow uncomfortable with the surprising surge in prices and end the production cutbacks sooner rather than later for the sake of market stability.

"The higher the oil price goes, the greater the danger the whole market could unravel," said Mehdi Variz, an oil industry analyst in London for the investment bank Dresdner Kleinwort Benson.


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