Zeev's Turnips Talk Politics (ZTTP)

[Rick Faurot]

Oil prices look set to dominate
The price of oil is set to dominate the week's headlines, with many analysts warning that its record-breaking surge may push the cost of a barrel over $50.

Governments and companies have already spoken of the damage that spiking fuel and raw material costs are likely to do to global growth and corporate profits.

Estimates vary on what the effect will be, but observers say the high prices will act like interest rate increases.

The fear is that consumers and firms will rein in spending, slowing growth.

Many voices

Global banking and investment group HSBC predicts that as much as 0.9% may be shaved off the world's gross domestic product (GDP) during the next two years.

US growth is likely to be hit hardest, with US consumers and companies having to pay an extra $112bn (£62bn; 91bn euros) this year, according to the bank's figures.


"Rising energy costs will put pressure on profit margins if companies operating in competitive markets are unable to pass the higher costs on in prices," HSBC said.

"This squeeze may discourage investment and employment."

The Sunday Times reported that Wall Street brokerage Lehman Brothers has cut its 2005 growth forecast for the US to 3.3% from 4%.

Firms in the UK, meanwhile, are facing a jump of as much as 50% in their utility bills, the newspaper said.

Oil prices are "the big downside risk", it quoted Mike Dicks, a Lehman economist, as saying. "And it is happening when business confidence is already low."

Build up

What has made markets especially jumpy is that a number of negative factors have all come together just as the US, and many of Europe's main economies, start to emerge from a slowdown.

The recovery is being seen as increasingly fragile, with some analysts pointing to disappointing labour figures in the US and concerns that corporate earnings may have peaked.

On top of that oil producers are pumping flat out, while the threat of disruption to production in Iraq, Russia and Venezuela has been fanning fears that demand may eventually outstrip supply.

"Global growth will hit increasing headwinds as oil prices act as a drag," the Sunday Times quoted Peter Luxton of Informa Global Markets as saying.

"The recovery could be aborted and the "soft patch" could turn soggy for a more prolonged period. The growth bulls face castration."

Helping hand

Oil production group Opec last week tried to play down the threat, adding it had boosted production in July.

However, even it had to admit that the longer prices stay high, the more damage they will do.

"Going forward much will depend on how long the price of the Opec reference basket remains above $35," Opec said in a statement. "The effect would be greater in 2005."

Oil slipped back from record levels on Friday, narrowly avoiding busting through the $50 a barrel mark.

New York light crude rose as high as $49.40 after reports of a new attack on an Iraqi oil pipeline, but then slipped back to close at $47.86.

Some analysts said that, while there may be short-term dips in the cost of crude, there was a real danger of prices surging even higher.

"Oil at $70 is entirely conceivable," said Bruce Evers, an oil expert with Investec. He said that all it would take to push prices to those levels "is a big supply problem" and if "Iraq and Venezuelan oil came off the market".
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/3588314.stm