Higher oil prices could destroy economic recovery

06 May 2008 / by Joy Tibbs
According to the Ernst and Young ITEM Club, sky-high oil prices could spell the end of any potential economic recovery, either in the UK or in other nations across the globe.

It was hoped that 2009/10 would see world economies struggle back onto their feet, but the Club's research suggests otherwise.

Economist at the ITEM Club Hetal Mehta said: “The modest upswing ITEM was predicting over the next couple of years in GDP growth is predicated on an oil price remaining below that of $100 per barrel.

"If this increases to $120 or $150 per barrel in the long term this has serious implications for the strength of the wider economy. If it hits $200 per barrel as one Opec minister recently predicted then frankly all bets may well be off.”

The group predicts that if oil prices rise to $150, economic growth for 2009 could fall from the current prediction of 1.5 per cent GDP growth to just 1.1 per cent. And predictions for 2010 could fall from a promising 2.7 per cent GDP growth to below 2 per cent. Oil prices have risen by approximately 400 per cent in the last seven years and 25 per cent in the first four months of 2008.

Mr Mehta said: “With oil permanently at $200 per barrel, the Governor of the Bank of England would be suffering from writers’ cramp with the number of letters he would have to write to the Chancellor explaining why the UK economy had breached the 2 per cent CPI target.

"ITEM predicts that the $200 per barrel scenario could potentially nearly treble the headline inflation rate next year from just over 2 per cent to 5.9 per cent per annum. Whilst that is hardly a return to the rampant inflation of the 1970s and 1980s, it would be a worrying trend after the tight control central banks have kept on inflation in recent years.”

However, not all news connected with oil and other types of energy is bad news. Oil, gas and natural resources now account for more than 35 per cent of blue-chip benchmark investment. And, according to Fidelity UK Growth Fund manager, Tom Ewing, companies with commodities at their core could be most representative of the health of London equities.

He said: "In my view, the outlook for natural resources companies continues to be positive, thanks to demand for metals and other materials in Asia. China is in the midst of development phase that is extremely resource intensive."

And consumers who are panicking about high oil prices may be cheered by British Gas' decision to cut the price of its Click Energy 5 product, a dual fuel tariff for gas and electricity customers. According to Paul Schofield, head of utilities at price comparison site moneysupermarket.com: "British Gas' Click Energy 5 deal is now king of the online tariffs following its price cut, which will come into effect on Thursday. This undercuts previous crown-holders npower by £12 for a medium user.

"This is all great news for the consumer who should take heed of the great savings to be made by choosing an online tariff. Those still languishing on standard deals should act now and jump onto the best online deal which could save consumers nearly £250 a year."

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