A FURTHER rise in oil prices poses the biggest threat to efforts to bring inflation under control, the Governor of the Bank of England has warned MPs.
Mervyn King's comments came as Chakib Khelil, president of the Organisation of the Petroleum Exporting Countries (Opec), predicted oil prices may rises as high as $170 per barrel over the summer.
Giving evidence to the Treasury select committee y
esterday, King said if inflation is stripped out, oil prices are now as high as they were in the 1970s.
A slowdown in the UK economy would help reduce inflation, King told the cross-party group of MPs.
The Governor vowed to return soaring inflation to the UK government's 2 per cent target.
His appearance before the select committee came a week after he wrote to Alistair Darling, the Chancellor, to explain why inflation hit 3.3 per cent in May – its highest level during the 11 years of the Bank of England's independence.
King's vow came as the AA revealed that average diesel prices hit £6 a gallon for the first time, at an average 132.03p per litre, 35 per cent dearer than a year ago.
Average unleaded petrol prices also hit a record of 118.65p per litre this week, or £5.39 a gallon, the AA said.
Filling up a tank with 50 litres now costs an extra £10.86 for petrol and £17.38 for diesel compared to a year ago, according to the latest figures.
Light, sweet crude for August delivery yesterday passed $135 per barrel on the New York Mercantile Exchange.
Last week, oil hit an all-time high of $139.89 per barrel, with prices up 40 per cent since the start of this year, largely as a result of concerns over supplies.
Prime Minister Gordon Brown is among a number of western leaders putting pressure on Opec to increase production, as inflation rockets on the back of higher oil and energy bills.
Meanwhile, Khelil predicted that the cost of crude would rise to between $150 and $170 per barrel this summer.
Khelil, who is also Algeria's energy minister, said he hoped the oil-price spike would ease back later in the year and dismissed market fears of a surge above $200 per barrel.
Yet he warned that a major market crisis – such as production stopping in Iran – could see prices rise to $200 or more.
Khelil said it had been clearly established that speculation was affecting markets.
"It's not a question, but a certainty," he said. "The problem is the extent of that speculation on the market."
Khelil reiterated that Opec tried to meet market demands. "It's very difficult now to find a market," he said.
"If you tell me there is someone to whom we haven't sold oil and who needs it, I'd see, but right now I put my oil on the market and I don't find buyer."
The full article contains 494 words and appears in The Scotsman newspaper.
