Output increase may not stem oil price shock

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The Independent Online

The world's economies face the risk of an oil price shock like the crises of the 1970s, analysts warned, as the leading oil producing countries meet today to decide whether to increase production.

The world's economies face the risk of an oil price shock like the crises of the 1970s, analysts warned, as the leading oil producing countries meet today to decide whether to increase production.

Ministers from members of the Organisation of Petroleum Exporting Countries (Opec) are expected to announce a small increase in global production as part of moves to help bring down the price of crude.

They will decide at a summit in Vienna on output limits after a year-old agreement to cap output expires on 31 March. The indication yesterday was that the total would rise by just about 5 per cent or 1.5 million barrels a day.

Analysts believe this increase will not be enough to stop further price rises. Some believe it could yet trigger a recession in the United States whose effects would be felt around the world.

However, Opec is due to meet again in June to review output with the aim of stabilising the price.

The benchmark futures price of Brent crude rose 2.5 per cent to $26.12 on Friday. The price has trebled over the last year and recently hit £31 for the first time since the Gulf War in 1991, as output cuts of 4.3 barrels a day started to bite.

Officials have indicated the producers might add 1-1.5 million barrels a day. However, since there have already been some breaches of the output curbs this would only amount to an extra 1 million barrels out of total current production of 23 barrels.

This would be much less than 2.3 million barrels a day that the International Energy Agency, the West's energy watchdog, said were needed to rebuild stocks and depress the soaring price.

"It seems like we'll see a 1.5 million increase," one analyst said. "That will be bullish - oil may return to $29 a barrel."

Soaring oil prices have been blamed for recent signs of accelerating inflation, particularly in the eurozone and the US, and analysts are on watch for further impact from crude prices.

Brendan Baker, an economist at Lombard Street Research in London, said there could be a further spike over the summer as Americans take to the roads for what is known as the "driving season". "We expect the high price of petrol to cause severe problems," he said.

Cambridge Econometrics said its model of the global economy indicated there was a risk of recession if the oil price stayed strong especially in certain European Union countries. "It looks likely that oil prices at least in the mid-$20s per barrel may be sustained and there remains a risk of an oil price shock of the scale of 1973/4 and 1979/80," it said. It said oil could provide the first real test of the eurozone's ability to withstand a major shock, especially in nations that used devaluation as a way out before the launch of the euro.

"Unless their labour markets become more flexible and the unions accept some loss in real income arising from higher oil prices... there will be large increases in unemployment," it warned. But it said the UK appeared more resilient to an oil price shock because of its more flexible labour market and deregulated energy markets.

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