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Thursday, 30 December, 1999, 20:41 GMT
What flows up must flow down

graph Oil prices have risen fast - but may fall later next year

By BBC News Online's Jane Harbidge

If your gas bill doubled in a year, you would be understandably worried.

Business Review of the year
If the prices of cars, computers, clothes or Corn Flakes doubled, the country would be in the grip of an inflation boom.

But the price of oil has more than doubled in the past year, with no mass panic.

petrol station High oil prices fuel petrol price rises
Oil is a staple commodity on which the world turns, the most used fuel, even ahead of gas.

It is used to produce electricity, it powers factories and motor vehicles run on it.

If oil prices go up, so do manufacturing and transportation costs - fuelling inflation.

Given that it is so precious, the price is watched keenly by anyone with an interest around the world.

At the end of last year, the price of crude sank to a low of $10 a barrel, causing severe problems for the economies of oil-producing nations.

Urgent action was needed. So in March, members of the Organisation of Petroleum Exporting Countries (Opec) agreed swingeing cuts in production.

In the past, Opec agreements have often been undermined by cheating from poorer countries, who kept up production to increase their exports.

Soaraway price

But this time, the deal seemed to work and the price of oil rose and rose.

In fact, the take-off in the price during 1999 was little short of spectacular, rising from $10 in February to more than $20 in August.

And it has appeared unstoppable, now hovering at about $24, little short of its value in January 1991, just before the Gulf War, when the invasion of Kuwait seriously disrupted supplies.

And some dealers believe it could reach $30 a barrel during the winter season in the Northern hemisphere, when demand for heating oil is at its height.

The soaraway price is all good for oil nations' economies - until it begins to have a knock-on effect on other prices, sparking off inflation.

Down again

Part of the reason why inflation has not taken off lies in the rapid speed of the price rise.

But part is also down to companies changing their approaches to energy.

At the same time, oil has become less relevant as Western economies move away from manufacturing and towards services.

has been so rapid that that fear has not yet come true - but it could soon do so.

So Opec is expected to ease off the brake when it meets again in March, allowing more production to take place.

Even so, experts believe the price will continue to rise in the first quarter of the new year, and could touch $30 a barrel as countries and companies build their stocks back up.

rig Oil production is likely to rise again
Lucy Haskins, oil analyst at Commerzbank, predicts the price will average out at $19.5 over next year, as a fall follows the initial rise.

"We expect it to go below $20 but not as low as $10," she said.

"If Opec didn't increase production in March, there would be significant problems but, they don't want to be seen as terrorists holding the world to ransom.

"They recognise it's not in their interests or anyone else's to keep the price right up. For one thing, it encourages governments to respond with efficiency drives and they don't want to be responsible for that."

The price of oil may not seem as vital as the price of computers or Corn Flakes - but we may all have good reason to watch its fluctuations.

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See also:
17 Nov 99 |  The Economy
Oil reaches nine-year high
23 Sep 99 |  The Economy
Slick strategy fuels inflation fears
22 Sep 99 |  The Economy
Oil price set to stay high
11 Nov 99 |  The Economy
Oil prices at three-year high
25 Aug 99 |  The Economy
Why we should worry about oil
06 Jul 99 |  The Economy
The power of essential oil

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