Brown calls for 'new deal' on oil to lessen price shocks

Economics Editor,Sean O'Grady
Monday 23 June 2008 00:00

The Prime Minister has called for a "new deal" between the world's oil producing and consuming nations, while the Chancellor has admitted that living standards in Britain will fall as inflation, fuelled by the oil price boom, persists.

Asked whether he agreed with the Governor of the Bank of England's prediction that people would have to endure below-inflation pay increases in the coming year, the Chancellor, Alistair Darling, told the BBC's Andrew Marr show: "Yes ... It will be difficult, it will be tough." He repeated that pay awards should be kept down.

In an effort to reduce the seemingly never-ending rise in the price of crude, Mr Brown travelled to an international oil summit in Saudi Arabia, where he declared: "We are going through the third big oil shock. This is probably the most difficult one. It is hitting people's standard of living very heavily. There must be a new deal between the oil producers and consumers. I am going to make it absolutely clear that we are going to reduce our dependence on oil. I want the oil-producing countries also to diversify out of oil and I want us to get a more balanced energy market."

Part of the Prime Minister's plan is to persuade the Opec nations and others to invest some of their vast foreign currency reserves in nuclear and renewable energy technologies in the West. When challenged on such a move, at a time when these funds seem more interested in buying into the West's distressed banks, Mr Brown said: "What's in it for them? They get the stability that is lacking in the oil markets and they can also bank on a non-oil future as well as an oil future. They have massive revenues for oil that ought to be invested in non-oil energy sources... We can, over time, get a new deal to bring the stability that every household, every business, everybody who goes to the petrol pumps is looking for."

How far the Gulf nations will heed Mr Brown is unclear, but Saudi Arabia was able to offer the West a more encouraging response to its pleas for more supply. King Abdullah said at the summit that his country, the world's biggest oil exporter, seeks "reasonable" prices.

His oil minister, Mr Ali al-Naimi, added: "Given our current spare capacity, I would like to state that for the remainder of this year Saudi Arabia is willing to produce additional barrels of crude oil above and beyond the 9.7 million barrels per day which we plan to produce during the month of July, if demand for such quantities materialises and our customers tell us they are needed."

He also said that the kingdom was willing to invest to boost its spare oil production.

Hoping to dampen the effects of the oil price boom on the British economy, Mr Darling yesterday repeated his calls for pay restraint. He said: "Pay awards in both the public and private sector have got to be consistent with our inflation target of 2 per cent." He confirmed that living standards would fall.

The Bank of England has forecast that inflation won't see 2 per cent again for another two or three years, and that for some of that time inflation will be "likely" to be more than twice that.

Union leaders have given ministers' arguments a dusty response. The results of a Unison ballot of 800,000 local government workers on strike action over pay is due today.

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