Oil price hits 10-year high on fears of looming US shortage

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The price of crude oil surged to its highest level for 10 years yesterday on mounting fears of a severe shortage of fuel in the US, the world's largest consumer.

The price of crude oil surged to its highest level for 10 years yesterday on mounting fears of a severe shortage of fuel in the US, the world's largest consumer.

The price of Brent crude hit $32.28, the highest level since November 1990 when the Gulf War sent prices spiralling.

But concerns about an inflationary price spike were soothed by separate figures showing inflation in the UK remained under control last month.

The 2.5 per cent rise in the oil price was driven by worries that US figures expected overnight would show stocks fell to a new low last week. Reports from the American Petroleum Institute have shown stocks falling to their lowest levels since 1976.

The buying frenzy was further fuelled by Hugo Chavez, the Venezuelan president, who said Opec, the producers' cartel, would stick to tight rules on supply quotas. Opec has managed to drive prices up from below $10 a barrel in December 1998 to more than $30 by sticking to an agreement to cut back on production.

Opec, which controls 40 per cent of the market, has added an extra 2 million barrels or 2.7 per cent to world supply this year under pressure from the US.

Charles Dumas, director of Lombard Street Research International, said this was the season when the US replenished its stocks ahead of the winter. "It is open to question whether they can be restored adequately in the next 12 months," he said.

A continuing rise in oil prices will ring alarms bells in the central banks of the US, Europe and the UK.

Figures for UK inflation showed there was still little sign of price pressure. The measure of year-on-year inflation that the Bank of England targets was unchanged at 2.2 per cent for July. The key factor was the sharpest fall in prices of clothing and footwear for more than half a century as high street competition and the strong pound kept a lid on inflation.

A 5.3 per cent fall in clothes prices helped drive goods inflation to 0.5 per cent from 0.7 per cent in July. Inflation in the booming services sector also eased, falling from 3.5 to 3.3 per cent, the lowest for almost two years.

The Office for National Statistics said the largest upward effect came from seasonal food with wet weather - the worst for seven years - driving up prices.

Seasonal food inflation leapt to 10.6 per cent from minus 0.6 per cent previously, adding 0.2 per cent to the headline figure.

Ciaran Barr, chief UK economist at Deutsche Bank, said: "Put simply, without the sharp and unexpected rise in food prices, [underlying ] inflation would have recorded a decline - possibly as low as 2 per cent."

Jonathan Loynes, of Capital Economics, said: "We stick to our view that rates have probably peaked." But James Carrick, at ABN-Amro, said there were "clouds on the inflation horizon". He added: "Inflationary pressures are still present ... prompting further rate hikes."

In stark contrast, inflation in the Irish Republic surged way ahead of forecasts to hit a fresh 15-year high last month.

Prices rose at 6.2 per cent in the year to July, up from 5.5 per cent in June and the highest since February 1985. Inflation in Ireland now runs at three times the average for the eurozone.