Global economy at risk from oil price rise

The world economy cannot sustain any further rise in the oil price, the International Energy Agency’s chief economist warned as oil prices rose toward a record high for the year.

Fatih Birol told the Financial Times that prices higher than about $70 could dampen a world economic recovery.

“If we go one step further, if we see prices go much higher than that, we may see it slow down and strangle economic recovery,” he said of oil prices on Friday, when the European benchmark was around $70.

European oil on Monday reached a high for the year of $73.75, spurred by manufacturing data from China and construction data from the US.

Fears have been raised over recent months that the inflationary effect of higher energy prices could impact the monetary measures taken by western governments to get their economies out of recession.

Nicolas Sarkozy, French president, and Gordon Brown, UK prime minister, called for better scrutiny of energy markets at the G8 meeting last month in Italy, and the US commodities regulator began hearings last week that are likely to result in more limits on oil futures trade. UK regulators are also considering whether energy futures markets are adequately controlled.

However, Mr Birol said that efforts to curb oil speculation were “a good step”, but were not going to significantly reduce prices.

Mr Birol said poorer countries such as those in sub-Saharan Africa would be particularly hurt by higher energy prices. “They will go through a . . . vicious circle of debt as they did a few years ago in order to finance their oil imports,” he said.

The real problem, he said, was declining investment in oil production, which if anything had worsened in recent months.

“If there is a continuation of declining investment in the upstream sector, in a few years’ time we may have major difficulties.”

He said Chinese demand would be an important determinant of oil prices, and the worldwide supply and demand balance could become very tight if other countries began to grow in 2011 or 2012.

World crude oil prices reached up to $147 in July 2008, but crashed to below $40 by the end of the year.

Francisco Blanch, commodity strategist at Bank of America, said the tolerable range of oil prices appeared to be somewhere between $70 and $80, with $80 being the upper limit of the band for developed economies. At $90-$100 a barrel he said even China could be affected.

He said that lower prices of oil and other commodities late last year was probably more beneficial to the global economy than any government stimulus effort. “This whole recovery is based on more liquidity being added to the system, when in fact the problem is we didn’t have enough oil,” he said.