Business Analysis: Growth worries mount as oil price surges to a new high

Pace of consumption to slow next year, says IEA

The list of possible reasons is endless but for businesses and households alike, the consequence is the same - the sharp rise in oil and petrol prices is starting to hurt.

The list of possible reasons is endless but for businesses and households alike, the consequence is the same - the sharp rise in oil and petrol prices is starting to hurt.

As the price of crude on world markets struck a new all-time high by bursting through $54 a barrel in New York, the Western world's energy watchdog warned that rising oil bills were slowing the world economy.

The International Energy Agency cut its forecast for growth in consumption next year by almost a fifth as record prices restrain economic growth.

The Paris-based agency cut its forecast for world oil demand growth in 2005 by 320,000 barrels a day to 1.45 million, forecasting global consumption at 83.85 million.

The projection, in the IEA's monthly oil market report, marks a sharp fall from this year's growth of 2.71 million barrels, the biggest increase in petroleum demand in 24 years.

"The cut reflects expectations of slower economic growth and the impact of high oil prices on demand and the economy," said the agency, which advises 26 industrialised nations.

The warning echoes similar caution from the International Monetary Fund, which said high oil prices would slice 0.3 percentage points off world growth next year.

Yesterday it was Venezuela's turn to appear in the dock, as traders blamed its unexpected decision to increase royalty taxes paid by foreign companies on some major oil ventures for the surge in prices. President Hugo Chavez cancelled a tax holiday for four foreign-financed extra heavy oil ventures that had allowed international companies to pay very low tax rates on oil output for years to cover high start-up costs.

US crude set a record $54.45 a barrel, marking a sixth successive day of all-time peaks. In London, Brent crude hit $51.50 a barrel, a rise of 1.7 per cent.

This was only the latest step on a path that has seen prices rise by 66 per cent so far this year, with analysts pencilling prices breaking above $60 a barrel before the year it out.

The core reason is basic economics - the interplay between demand and supply. Put simply, a growing economy has caused demand to surge. The IMF expected this year to show world economic growth of 5.0 per cent, the strongest for some three decades.

More importantly, the fastest growing single country will be China with annual GDP growth of 9.0 per cent. Furthermore, this boom is driven by an industrial revolution that is sucking up the world's spare supplies of a whole range of commodities including oil and a range of petroleum products.

At the same time, a series of natural and man-made crises have restricted supplies of crude. Hurricane Ivan inflicted widespread damage to facilities in the Gulf of Mexico last month that has taken some 475,000 barrels a day (bpd) out of production. Meanwhile in Norway, a rig workers' strike widened yesterday, forcing the world's third-largest exporter to shut in 55,000 bpd. There has also been labour unrest in Nigeria and Venezuela. The west African state was the source of further problems yesterday after saboteurs set fire to a major oil pipeline feeding an export terminal.

Overarching these one-off factors is the growing concern that Middle Eastern oil facilities could be targeted by al-Qa'ida terrorists. Insurgents have already struck at Iraqi facilities.

As if speculators did not have enough to feed off, the world has left itself with very little spare production capacity.

After several years of running a policy of restricting supply to prevent a repeat of the slump in oil prices of the late 1990s, Opec, the producers' cartel, now has little room to help out by boosting production - despite repeated tough talking with the Group of Seven rich nations.

Meanwhile, years of under-investment by the major oil companies has left the West with insufficient refining capacity to produce the types of fuel that business needs.

On top of this, the Western hemisphere is approaching winter, when demand for energy rises, at a time when stocks of energy products is below its five-year average.

What can bring this price juggernaut to a halt? The answer, ironically, is the very scale of the price rises that have so alarmed people. In other words, as prices rise and slow global growth, so the major economies will curb their demand for oil.

David Robinson, the deputy director of the IMF's research department, said a slowdown or even a crash in the Chinese economy would actually be beneficial.

The IEA concurred, saying early indications were that growth in Chinese oil demand was being slowed by high prices, falling in August to an annual 6 per cent rise from 12 per cent in July and 25 per cent in the second quarter.

"The current oil price rally [is] galvanising energy-saving efforts and fuel-switching away from oil in China," it said.

Such an environmentally friendly policy would be the ideal solution. Last night, oil prices retreated from their record highs, on speculation that the level of demand did not justify such high prices.

That is a long-term issue. But in the meantime, the issue will move further up the political agenda, especially in Britain. The price of petrol has jumped by a penny and half in recent days as oil companies have reacted to the latest surge.

The latest increase has brought prices even closer to the 85p-a-litre levels seen at the time of the pump protests in 2000. In an ominous sign for Gordon Brown, the Chancellor, French farmers blocked fuel depots to protest against rising oil prices and to demand a tax cut on petroleum products used in farming. The heat may soon be felt on this side of the Channel.