Oil price falls to below $100 per barrel

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The Independent Online

The price of oil plunged closer to the psychologically important level of $100 per barrel yesterday, raising the prospect of lower inflation and lower interest rates next year.

By early evening in Europe, US light sweet crude was down more than $3 at $103.26, while Brent crude was $4.14 lower at $99.30. Prices had hit a record of $147 a barrel in July.

Several factors have contributed to the decline – most recently a pledge from Chakib Khelli, president of the Organisation of Petroleum Exporting Countries (Opec), that the cartel would not cut production. Mr Khelli, the Algerian Oil Minister, told an Opec conference in Vienna: "We are going to stay with the level of production where we are now."

Comments by Saudi Arabia, Opec's chief producer, that the market was "fairly well-balanced" also suggested that output would be unchanged. This led the financial markets to conclude that, for now at least, oil will stabilise at about $90 to $100.

That is still 50 per cent higher than last year and about 10 times what it was a decade ago, but the possibility that inflation may soon abate will be widely welcomed.

Oil prices are falling partly because o f the strength of the US dollar, but the fundamental reason is the slowdown in the global economy and fears of recession in America and Europe. Economic growth in China, India and other emerging markets is also stalling, which has depressed demand for oil and other raw materials.

As governments turn to alternative energy sources and motorists switch from gas-guzzling 4x4s to smaller cars and public transport, demand for oil has visibly reduced.

The effect of lower fuel costs will soon feed through to a slower rate of price rises in shops. This week's figures for "factory gate" inflation indicated that manufacturers in Britain are already feeling the benefit of lower commodity prices.

Although inflation is expected to peak at about 5 per cent this autumn, evidence is mounting that, to quote the Bank of England policy-maker David Blanchflower, it will "plummet like a stone" soon afterwards.

Mr Blanchflower has consistently warned colleagues about the danger of leaving interest rates too high and has argued passionately for an early reduction. His pleas have so far gone unheeded, but economists expect an aggressive programme of rate cuts from the Bank to begin later this year.

David Shaw, an economist at Investec, said yesterday: "This easing in oil prices should help reverse a spike in UK inflation. We forecast it falling back from an expected peak of 5.1 per cent to below 2 per cent in the second half of next year."