Crude oil jumped to within striking distance of $100 a barrel yesterday as the dollar tumbled to record lows, prompting fresh fears of a resurgence of global inflation.
Responding to the price rise, Frederic Mishkin, US Federal Reserve governor, warned that central banks needed to "make sure that it does not spill over into long-run inflation impacts" but said authorities should not overreact to short-term figures.
Simon Derrick, analyst at Bank of New York Mellon, said: "Concerns among investors are clearly growing about rising inflation globally and in the US in particular."
The concerns come as the European Central Bank and the UK's Bank of England meet today to consider interest rate policy amid slowing economies hit by a second wave of credit turmoil.
West Texas Intermediate crude, the global benchmark, rose to a nominal record of $98.62 a barrel - up almost 60 per cent since January - propelled by tight supply, robust demand and falling inventories, as well as investors betting on more dollarweakness.
Crude prices stalled their rally later as data showed that US oil inventories declined less than feared last week, prompting some profit taking.
Demand, particularly from emerging economies such as China and India, has been a major factor behind the rise in oil prices which have quadrupled since 2002, according to Simon Barry, senior economist and associate director of corporate markets with Ulster Bank. The supply/demand balance is very tight and geopolitical tensions or supply disruptions tend to lead to additional upward momentum in price, said MR Barry.
As oil closes in on $100, governments are fretting over their economies. The International Energy Agency (IEA) warned yesterday that oil could soar to a nominal $159 in 2030 with higher-than-expected demand growth.
"We are experiencing high oil prices today and, if actions are not taken in years to come, we can see a supply crunch, which is not good news for anybody, and it may end up with very high prices," said IEA chief economist Fatih Birol.
However, Mr Barry said that the global economy has weathered the rise in oil prices well since 1999 when oil was as low as $10 a barrel.
"With every milestone that has come and gone there has been no material implications for the global economy," he said.
"The last four years have been the strongest since the early 1970s despite the rise in oil prices."
But he said that $100 a barrel marks a psychological barrier and may have a knock-on effect on consumer confidence.
"We're into uncharted territory and have no idea how damaging to confidence that will be."
Higher oil prices, combined with higher food prices, will feed into the euro zone inflation rate which could average as high as 2.8 per cent next year and this could have a knock-on impact on interest rates, he said.
