The European Central Bank (ECB) has warned that high oil prices could threaten Europe's economic recovery, although any oil crisis is likely to be less severe than in the 1970s and 1980s.
Speaking in Brussels after the ECB's governing council left interest rates unchanged at 2 per cent, the ECB President, Mr Jean-Claude Trichet, said that the euro zone's recovery was continuing but that uncertainty centred on oil prices.
"If oil prices were to remain high, or even increase further, it could dampen the strength of the recovery, both inside and outside the euro area, even though the oil intensity of production has fallen significantly since the 1970s and 1980s. All in all, while the burden resulting from higher oil prices cannot be avoided, its medium-term impact should be of a more limited magnitude than in the past. Obviously, for this outcome to materialise, all parties concerned must live up to their responsibilities," he said.
Mr Trichet said that modest wage agreements had helped to keep inflation down and hinted that interest rates are unlikely to rise in the short term. He warned governments against imposing new indirect taxes that could push inflation above the ECB's target of around 2 per cent.
Mr Trichet repeated the ECB's warning against changing the text of the Stability and Growth Pact to give governments greater budgetary leeway.
"We consider the pact as key to ensuring macroeconomic stability on a sustainable basis. It is a framework which is necessary to preserve sound fiscal policies in the euro area, for which strict surveillance and effective peer pressure on national budget policies are indispensable," he said.
In the hours after Mr Trichet spoke, oil prices scaled new heights at $53 for US crude on concerns over tight winter heating fuel supplies and an unexpected strike at Nigerian oil terminals.
US light crude set a record $53 a barrel, marking a surge of $20 or more than 60 percent this year, closing up 60 cents at $52.62 a barrel. London Brent crude also struck a new peak at $49.20 a barrel, ending up 91 cents at $48.90 a barrel.
Yesterday a new threat emerged in Nigeria, a major OPEC producer and a supplier of high-quality crude grades prized for their yield of transportation fuels. Nigerian oil unions began an unexpected two-day strike at Royal Dutch Shell Group facilities to protest feared job cuts.
US supply worries have intensified after Hurricane Ivan cut September US crude production to its lowest in any month since 1950 and disrupted operations at refineries along the Gulf Coast. - (Additional reporting Reuters)
