The UK and Saudi Arabia on Tuesday took steps to try to cool record oil prices, a day after Brent crude hit an all-time high in sterling terms.
Chris Huhne, UK energy and climate change secretary, and Ali Ibrahim Al-Naimi, the Saudi oil minister, said ahead of a meeting in Riyadh later on Tuesday that the current oil price does not “reflect the realities” of supply and demand in the global energy market.
Crude prices have soared above $100 since the beginning of the year as civil unrest has toppled governments across the oil-producing countries of the Middle East and north Africa.
Saudi Arabia, one of the biggest oil producers in the world, has repeatedly increased supplies to make up for loss of supplies from countries like Libya and Egypt.
But the oil price in sterling terms hit a record high on Monday, threatening to further squeeze incomes and increase pressure on the Bank of England to raise interest rates.
Brent crude prices on Tuesday fell slightly below a record high of $121 hit on Monday, still below the nominal high of $147 a barrel it reached in June 2008. But the 17 percent fall of sterling against the dollar over the past two years has raised the sterling price per barrel to £74.60, higher than the record set in 2008.
“There is no shortage of supply, and yet the price has remained high. International energy markets should understand that the current price of oil does not reflect the realities of supply and demand,” Mr Huhne said in a statement.
“Building greater understanding between consumer and producer countries is more important than ever in these present circumstances.”
Members of the Bank’s monetary policy committee have said they expect higher oil prices to fuel inflation. But economists do not think the Bank will vote to increase rates at their MPC meeting on Thursday.
Investors, however, are betting that rates will start to go up before August. The European Central Bank is almost certain to raise interest rates this week.
While the overall rate of inflation in the UK rose to 4.4 percent in February, within that figure transport services rose more than 10 percent and fuel and lubricant prices surged almost 16 percent.
When the cost of oil was last this expensive, the British economy suffered stagflation. Inflation rose through 5 percent even as the economy went into recession.
A labour strike in Gabon, a small oil producing nation in West Africa, was the latest spur for higher crude prices. They had already been surging because of the unrest in Libya. The effect has been amplified in Britain as sterling has also edged lower.
“Wholesale prices have gone up significantly since the start of the year and also since the price rises last autumn, said an executive at one of Britain’s big six utilities.
“UK wholesale gas prices are up about 25 percent since January and about 30 per cent since the last round of price rises in November. The trend is pretty clear,” he said.
Petrol and diesel prices are also at record levels. In March a litre of unleaded petrol cost on average £1.32 compared with £1.18 in June, with the rising trend exacerbated by higher fuel taxes.
Even after fuel duty rates were cut in last month’s Budget, a litre of unleaded petrol now attracts a duty of 58p and 20 percent value added tax compared with 50p and 17.5 percent VAT in the summer of 2008.
The latest rise in global oil prices and a further drop in sterling will soon be felt at the petrol pump.
Paul Horsnell, head of commodities research at Barclays Capital in London, noted that UK motorists will have to weather the triple impact of a weakening sterling, rising oil prices and higher fuel taxes.
“All together, it is a very large impact,” he said.
High energy prices also reduce household income levels and spending on goods and services because motorists cannot quickly cut back on petrol.
The record prices will intensify the dilemma faced by the MPC since it will raise the inflation rate. The UK economy fell into recession when energy prices were high in the second quarter of 2008, well before the collapse of Lehman Brothers.
Currency fluctuations have, in other cases, moderated the impact of rising energy prices. While oil is 18 percent off its all-time dollar high, in yen terms it is 35 percent below.