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Global economy threatened by high oil prices


The latest monthly report from the International Energy Agency (IEA) warned that the global economy could suffer a slowdown unless oil prices fall from their current high levels.

The price of Brent crude has risen by around 50 per cent in the last six months, first on very strong demand as global economies picked up post-recession and, this year, "on increased regional geopolitical risk in North Africa and the Middle East, embodied by Libya’s supply outage," the IEA said.

The effect of this increased oil price will be exacerbated by the expected global fiscal tightening later in the year due to growing inflationary pressures.

"If prices remain at current levels or rise further, by September 2011, if not before, the global economy may feature a marked slowdown," the IEA report said.

Although it is always difficult to estimate exactly what the impact of higher oil prices will be, the IEA highlighted that a 10 per cent increase in the price of oil could cut global growth by between 0.2 and 0.7 percentage points after one year, and possibly by twice as much in the second year.

Commenting on the unrest in Libya, the IEA said that oil production, and certainly exports, had practically ground to a halt in the OPEC member country.

"What is becoming clearer is that the country's oil exports of some 1.3 million barrels per day will remain off the market for a considerable time due to both war inflicted damage and international sanctions," the IEA said.