Price spiral fear as oil tops $100 mark
Oil prices surged past the $100 a barrel mark for the first time in history yesterday, sparking concerns of a price spiral.
The landmark figure means everyone faces the prospect of further increases in the price of petrol, home heating, food and airline tickets.
Crude oil hit the landmark $100 threshold on the New York Mercantile Exchange shortly after noon local time, sending shockwaves through the world's financial markets.
Analysts warned that inflation and high energy prices would remain a key threat on the economic agenda throughout 2008 as gold and platinum also hit record highs.
Oil prices, which had fallen to a low of $50 a barrel at the beginning of 2007, have now quadrupled since 2003 and rose 58pc last year. The Consumers' Association of Ireland last night warned the rise meant we were "looking down the barrel of a difficult situation" -- and it could mean "more than just belt tightening".
High oil and gas prices stoke up inflationary pressure, as they increase the cost of moving goods and doing business.
The increase feeds through to higher inflation, and ultimately hits the chances of a cut in lending rates. The rise was blamed on a combination of global political turmoil, tight energy stockpiles in consumer countries and a weak dollar.
Dermot Jewell of the Consumers' Association said: "There can be no doubt we have started the year by taking on an uncomfortable situation, and one where we have very little control. We are looking down the barrrel of a very difficult situation. At the petrol pump and in terms of heating costs, we will see the first increases perhaps in a matter of days."
Almost all of domestic transport in Ireland is by means of road (301 million tonnes or 99pc in 2006), meaning that the cost of deliveries will also increase.
"We need a reasonable approach from distributors and retailers. They must be careful not to pass all the pressure on to the consumers because they have enough demands on them," Mr Jewell added. "This could go beyond more than just belt tightening, and that is not good for business either."
Some analysts believe strong demand for petroleum products in 2008 and geopolitical tensions, particularly in the Middle East, will also keep prices around $100 a barrel.
Reaction to the assassination of the former Pakistani prime minister Benazir Bhutto also contributed to the rising prices. The cocktail was enough to trigger a flood of speculative oil buying, dealers said, with investors buying into crude as a hedge against falling stock prices.
Analysts said they expected oil prices to rise further still in the coming months and years, due to a combination of higher demand from fast-growing countries such as China and falling supply caused as refineries struggle to produce oil products and satisfy their customers.
Gas prices, which usually rise in concert with oil, are also likely to leap, too, raising the price of heating during the coldest months of the year.
Oil's climb to the psychological triple-digit mark sent Wall Street tumbling, and darkened an already gloomy economic outlook in the US, battered by a housing crisis. Weakness in the dollar has added to its gains, with exporting countries looking to recoup the value lost due to the falling value of the US currency. The price was also driven by an unusual trend in US petrol prices, which normally fall back at this time of year.
According to US government data, pump prices rose at a time of year when they were normally on the decline. The jump yesterday of more than 4pc in crude prices came amid fresh violence in Nigeria, the world's eighth largest oil exporter. Suspected militant attacks in the country's oil city Port Harcourt have heightened concern over the potential for further disruptions in shipments.
Frequent attacks by militant groups since February 2006 have driven thousands of foreign oil workers from the oil-rich Niger Delta and cut oil exports by about 20pc.
The increase comes on the heels of one of the worst years in living memory for energy prices. Crude oil prices jumped 58pc in 2007 -- the biggest annual gain in more than a decade -- driven by rising demand in China and other developing countries and increased economic turmoil.
It has led to rises in domestic energy bills, with the cost of electricity, gas and other fuels rising in tandem with crude prices.
And economists expect that, long term, the increase will feed through to other sectors of the economy as companies try to recover the cost of higher manufacturing and transport costs which can be directly linked to crude price increases.