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Last Updated: Thursday, 5 August, 2004, 21:29 GMT 22:29 UK
Record oil prices threaten growth
Oil rig
World demand for oil is high
World economic growth is being threatened by the continuing high price of oil, a leading expert has warned.

Dr Fatih Birol, chief economist at the International Energy Agency, said oil at $35 a barrel would take half a percentage point off global growth.

On Thursday, US light sweet crude for September delivery hit a record close $44.41 a barrel, after touching $44.50.

The continuing upward drive of prices saw the Dow Jones drop below 10,000 points for the first time in two weeks.

Markets reacted adversely to the continued oil price highs, which saw crude futures above $44 a barrel for the fifth straight session.

If we do not see any real increases [in supply] from oil producing countries, and if geopolitical tensions continue, we have every reason to worry about even higher oil prices
Dr Fatih Birol, International Energy Agency

As well as the Dow, the Nasdaq and the S&P 500 were also down, as markets got the jitters after the Russian justice ministry went back on a decision allowing Yukos access to accounts essential to its operational running.

London Brent futures touched a record $41.30, before settling at $41.12, also a record closing level.

Dr Birol said recent price rises have now taken the average oil price for the year to the $35 level.

Unless prices fall, the average price for the year will end up being higher than that and more than half a percentage point will be taken off world economic growth in 2004.

He said countries heavily reliant on oil imports, particularly in Europe (though not Norway or the UK) and the developing world, were most at risk.

World tensions

"If oil prices remain at the same high levels it is going to have a negative impact," Dr Birol told BBC News Online.

"If we do not see any real increases [in supply] from oil producing countries, and if geopolitical tensions continue, we have every reason to worry about even higher oil prices," he said.

Thursday's fresh high prices came after 21-year highs were reached early on Wednesday, with US-traded crude reaching $44.30 a barrel.

The Paris-based International Energy Agency said sustained higher oil prices would reduce the combined GDP of the 12 member eurozone by 0.5% in 2004 and 2005.

The Organisation for Economic Cooperation & Development has forecast eurozone GDP growth of 1.6% this year and 2.4% in 2005.

"Every indication backs our predictions. We expect GDP projections are going to be revised," said Dr Birol.

Spare capacity

Dr Birol said oil-importing developing nations were most at risk from sustained high oil prices - with a possible reduction in GDP reaching more than 3% for countries in sub-Saharan Africa.

The IEA also predicted Japanese GDP would be reduced by 0.4% and US GDP by 0.2% if prices remain at an average $35 a barrel.

Along with an increasing demand for oil from emerging industrial giants such as China, and political tensions in the Middle East and Russia, Dr Birol said fears over the lack of spare capacity in oil markets was helping to keep prices higher.

The IEA estimates that a "comfortable" level of spare capacity is between 2 and 3 million barrels per day (bpd), on top of current total world oil output of 81 million bpd.

However, Dr Birol said extra capacity was currently running at less than 1 million bpd.

"There is very little spare oil capacity, which means there is little to cushion investors' nerves," he said.

On Thursday, US-traded crude oil rose $1.07 to $43.90 a barrel.

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