Oil price hike 'could stifle recovery'

By Ian Lyall for MailOnline
Updated: 03:04 EDT, 6 May 2008

Soaring oil prices could 'snuff out' hopes of an economic recovery, economists warned yesterday.

'All bets are off' if oil goes above $200 a barrel.

Since the cost of petrol crashed through the £5-a-gallon mark, the impact has spread beyond motorists and haulage companies.

A report from the respected Ernst & Young Item Club predicted that the British economy will experience only modest growth next year - and only if the cost of oil stays below $100 a barrel.

However, the price of crude oil last night rose $3.89 to a fresh high of $120.21.

Oil prices have risen by around 400% during the past seven years and by 25% in the first four months of 2008 alone.

Hetal Mehta of Ernst & Young warned that a price above $150 would have 'grave implications' for Britain.

Such prices would mean Ernst & Young's forecast for economic growth next year would be cut from its current prediction of 1.5% back to 1.1%.

She added that if the cost surged above $200 a barrel 'all bets are off'.

Algerian energy minister Chakib Khelil, a member of the Opec oil cartel, recently warned that this higher figure could very soon be a reality.

Despite a recent switch to green sources of fuel and power, Britain is still heavily reliant on oil.

It is used in the production of plastics, such as containers and bottles, and manufacturers are starting to pass on the rising cost of transportation and raw materials to consumers. This inflationary pressure-is likely to convince the Bank of England-on Thursday to keep interest rates in check at 5%.

The picture could be just as worrying in the years ahead. Ernst & Young predicted that painfully high fuel costs could limit growth to 2% in 2010.

Many commentators had expected a 2.7% growth rate for that year. Even more worryingly, the rate of inflation would be almost 6%.

Miss Mehta said: 'Our predictions don't take into account the impact on public confidence that this type of oil price increase would have and how that would feed back into the economy, so we may well be underestimating the potential downside.'