Terror fears push oil prices to 22-year high

The price of oil rose to its highest level for more than 22 years after warnings of imminent terror attacks against Westerners in Saudi Arabia.

There was also evidence that the surge in the price of crude oil ­ driven in part by the invasion of Iraq and more general concerns about the security of the commodity's supply ­ is poised to have a significant impact on the spending power of British consumers. In some areas the cost of a litre of unleaded petrol is over £1. Gas prices, which are also dependent on it, will increase by 11.9 per cent this month, according to Powergen, the supply company. And rising fuel bills faced by the airlines are likely to be passed on to passengers.

The latest rise of oil prices ­ which stood at almost $64 a barrel last night ­ may also hurt homeowners. According to figures released yesterday, the cost of raw materials rose at their fastest annual rate for more than 20 years in July, with higher oil prices largely to blame. Economists warned that the prospects of lower interest rates, desperately needed to boost the sluggish retail sector and a stagnant property market, had shrunk dramatically.

Since 1999, the rise of oil prices has been relentless, from about $10 a barrel in that year, reaching $40 last year, and now standing well above $60. Factors include increasing demand from emerging market economies such as China. But the succession of terrorist attacks from the 11 September 2001 strikes on the World Trade Centre in New York to the atrocities in London on 7 July and the failed attacks two weeks later have created uncertainty that has undermined confidence in the supply of oil. Add to that the war in Iraq, and the bloody aftermath, and there has been only one way for oil prices to go in recent years. Now British consumers may start to feel the pain. And some analysts are even talking of prices going above $100 a barrel, which could deal a serious blow to the world economy.

The Automobile Association says that a rise of $2 to $3 in crude oil translates into an extra penny on prices at the pump in the UK. British motorists are now spending an extra £7.5m a day on fuel, compared with the beginning of the year. Ruth Bridger at the AA said: "I can't see prices going down in the short term. Crude oil has gone up by over $20 a barrel since January. If it carries on rising like that, to $80 ­ perish the thought ­ we could see a pound a litre for petrol prices nationwide."

The oil price surge also means soaring fuel bills for UK companies, especially airlines. British Airways warned last week that its annual fuel bill was likely to be £75m higher than previously thought, and £525m above last year's level. The low-cost carrier easyJet said its fuel costs could reach £260m, forcing cuts in other parts of the business.

The oil market is particularly sensitive to bad news from Saudi Arabia, the world's largest supplier of the commodity, hence the reaction to yesterday's warning. The Foreign Office says there were "credible reports" that terrorists were in the "final stages" of planning attacks against Westerners in Saudi Arabia.

Non-essential staff and dependants at UK missions in the country are being allowed to leave and British travellers were told to take extreme care if they decided to remain or visit the kingdom. The US shut its missions there on Sunday and Australia has told its citizens to avoid travel to the country.

Since May 2003, Islamic militants have carried out numerous suicide bombings, including on Western housing compounds, and kidnappings. A notice on the British embassy's website warned of a continuing "high threat" of terrorism in Saudi Arabia. The revised travel advice cautioned: " There are credible reports that terrorists are in the final stages of planning attacks. There is a continuing high threat of terrorism in Saudi Arabia. We continue to believe that terrorists are planning further attacks, including against Westerners and places associated with Westerners in Saudi Arabia."

It adds: "We have allowed non-essential staff and dependants at our missions in Saudi Arabia to leave if they wish." A more detailed note on the website warned that aircraft and pleasure boats remain a possible terrorist target. The statement noted that there were "ongoing security concerns in the region, including for seaborne vessels travelling in the southern Red Sea".

Al-Qa'ida supporters have waged a bombing campaign since 2003 to expel Westerners and destabilise the pro-Western royal family.

Suicide bombers have hit several compounds housing foreigners, and militants also staged a daylight raid on the US consulate in Jeddah. At least 91 foreign nationals and Saudi civilians have been killed.

Last month, the US warned Americans in Saudi Arabia that militants were planning fresh attacks, and later banned military personnel from travelling around the kingdom.

The Foreign Office said the reference to credible reports about terrorists planning new attacks was a response to a decision on Sunday by the US embassy to shut all three of its missions to Saudi Arabia, and because of threats against US government buildings in the kingdom. The US embassy in the Saudi capital, Riyadh, and missions in the cities of Jeddah and Dhahran were closed because of a "specific and credible threat," according to the Riyadh mission.

The US embassy warning was the second in two weeks. It cautioned Americans on 25 July that militants were probably plotting new attacks. Concerns over possible terrorist attacks in Saudi Arabia were exacerbated by the news that yet another US refinery had run into production problems, fuelling speculation that the world's largest economy could run short of gasoline before the summer ends. Over the weekend a fire shut a 200,000-barrel-a-day crude oil division at Sunoco's Philadelphia oil refinery. US refineries have been hit by more than six shutdowns in the past few weeks as plants struggle to keep up with two years of unexpectedly strong demand following a decade of under-investment. Experts say a severe hurricane season could knock out yet more US output.

News that Opec's second-largest producer, Iran, had resumed its nuclear work, despite warnings from the European Union of possible United Nations sanctions, also weighed on markets yesterday.