The trend in oil prices is posing a threat to the outlook for international inflation and economic growth. Crude oil is now trading at over $32 a barrel, a level last seen when Iraq invaded Kuwait in 1990. Analysts fear that even if the oil producing countries in OPEC decide to increase supplies at a meeting this weekend in Vienna - and there is no guarantee that they will - it is already too late to bring about a quick decline in prices. As demand for oil rises heading into the winter months in the Northern hemisphere, prices look set to remain high; more pessimistic analysts are warning about the risk of shortages and of substantially higher prices.
Saudi Arabia, traditionally the most influential voice in the Organisation for Petroleum Exporting Countries, is believed to favour an increase in production. But some other members may argue against this and the likely outcome of the meeting remains unclear. If a meaningful increase in supply is not agreed, then negative sentiment in the market and the low level of supplies in major economies such as the US could combine to send prices higher still.
The pressures caused by rising oil prices are already becoming all too clear. French fishermen wrung concessions from their government and truckers, taxi-drivers and farmers are now blockading fuel depots to make their case. Here, hauliers are seeking a meeting with the Minister for Finance, Mr McCreevy, to seek financial measures to ease the burden of higher fuel costs. Comments from the US administration, urging OPEC to increase production, and a decision by the euro zone finance ministers to discuss the issue at a meeting on Friday illustrate the building concern about the impact of rising oil prices on the outlook for growth and inflation.
Among those earnestly hoping that OPEC will agree to boost production and that prices will fall as a result will be Mr McCreevy. Last month his department increased its forecast for the average rate of inflation this year to 5.25 per cent, but said this assumed stable oil prices. This assumption now appears unfounded, as does the department's faith in the stability of the euro. Further weakness in the single currency, evident yesterday on the international markets, poses another threat to the inflationary outlook, as it will push up the price of imports. The only good news for the Government is the price war in the supermarket sector, which will help to hold down food prices.
The Government can obviously do little to influence the value of oil prices, or to affect the rate at which the euro trades. However there is a case now for serious consideration of lowering some fuel excise duties. This would lower the measured rate of inflation - thus taking some of the pressure off short-term wage demands - and help the sectors worst affected. It would, however, be only a short-term measure. Vigorous action to boost competition across the economy is the best long-term recipe to fight inflation.
While rising inflation is one worry for our economy, the longer-term impact on international economic growth of higher oil prices is another. A sustained international slowdown could bring rapid economic growth here to a sudden halt. It is far too early to predict such a scenario - and we must remember that the international economy is now less dependent on oil than was the case in the 1970s - but a sustained further rise in oil prices would be a real danger to the economic outlook.