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Oil price rise a threat to economic recovery.

Byline: Iain Laing

OIL prices are "overheated" following crude's recent run to 18-month highs, the International Energy Agency (IEA) has warned.

Last week oil prices hit US$87 a barrel - the dearest since October 2008 - but the IEA said crude costs have run ahead of a fragile economic recovery.

While some recovery in demand has supported prices at around US$70-80 a barrel, the IEA raised questions over "the sustainability of prices markedly higher than those levels".

Motorists have felt the pain of the recent oil surge which - along with duty hikes and a weak pound - have pushed pump prices to an all-time high.

The IEA's warning also raises the spectre of another market driven bubble in oil prices which helped push crude to a record US$147 a barrel in 2008, saying "recent exuberance ... may have played a role".

The spike could also choke off recovery in developed Organisation for Economic Co-operation and Development (OECD) countries, it added. The IEA said a manufacturing-led, export-based recovery in Europe "appears to be ebbing", with higher prices potentially punishing developed economies.

"Any potential renewed surge in prices ... plus tighter credit than two years ago, could stall OECD economic recovery or render it more "oil-less" than we currently envisage," the report warned.

The IEA has left its estimates for OECD oil demand unchanged in 2010 as stronger demand in North America and the Pacific region offsets "inordinately weak" European data.

"Although industrial production has risen in France, Germany and the UK, it remains well below pre-recession levels, while in Italy and Spain it has barely increased from its recessionary depths.

"In addition, Greece's continued fiscal predicament has introduced a further element of economic uncertainty," the IEA warned.

Meanwhile, the energy advisory firm lifted its forecasts for non-OECD countries to account for higher-than-expected demand from Asian countries such as China.

Although refining in Europe fell to 17-year lows during February, global refining saw its first year-on-year increase since the beginning of the recession - driven by China, India and Russia.

"It is worth noting that six large non-OECD countries - China, Saudi Arabia, Russia, Brazil, Iran and India - are expected to account for almost three-quarters of global oil demand growth in 2010," the IEA added.


WARNING The International Energy Agency says the oil price is too high and may choke off economic recovery
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Publication:The Journal (Newcastle, England)
Date:Apr 14, 2010
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