US light crude prices hit record highs

US LIGHT CRUDE oil hit record highs early yesterday, breaking $57 for the first time.

Despite OPEC’s pledge the day before to increase output by 500,000 barrels a day, the price of light crude gained 56 cents to $57.03 a barrel while London’s brent crude put on 65 cents to a new record $55.53 a barrel.

OPEC president Sheikh Ahmad al-Fahd al-Sabah said the group will consider early talks on further output increases if prices do not ease back.

The Small Firms Association (SFA) warned oil price hikes could “unravel” strong growth forecasts.

Every $10pb rise in oil knocks 0.5% off economic growth, the SFA said in its review.

Energy costs have become a major impediment to competitiveness, warned SFA director Pat Delaney.

Last year, Irish manufacturing lost 9,500 jobs and the more vulnerable sectors are struggling with overpriced labour, he said. Employment prospects are described as “fair” as wage increases and manufacturing losses take their toll.

Despite oil concerns, the general outlook for the economy remains favourable, though the SFA expects growth to be slightly lower than budgetary forecast because of weaker world growth, the strength of the euro and the continued pressure on oil prices.

“Oil prices will determine the level of economic growth over the coming months and could potentially unravel the growth forecast for 2005 as every $10 increase in the price of oil above an expected average of $45 will cut economic growth by 0.5%,” he said.

The economy is growing at its potential, but at a much lower pace than during the Celtic Tiger era.

We have to adjust and expectations accordingly.

SFA is forecasting GDP growth of 5.1%, an unemployment rate of 4.2% and labour growth below 2%.

Wage rises, which averaged 5.4% last year against productivity growth of just 2.6% are a serious concern. The current level of wage drift is not sustainable and will weaken employment prospects in the exposed sectors of the economy.

Irish labour is overpriced at 134% of the EU average, said Mr Delaney.

In a separate warning, the International Energy Agency oil think-tank in Paris warned global oil consumption has caught up with crude and refining capacity.

“If supply continues to struggle to keep up, more policy attention may come to be directed at oil demand intensity in our economies and alternatives,” said the IEA.

Oil prices, adjusted for inflation are still well off the all-time peak hit in 1980 when between the period April and July the price per barrel was $39.50.

Current prices would have to hit $90pb to match that all-time record high.

According to the IEA, global oil demand will increase by 1.8m barrels a day in 2005 while refining capacity will fall well short of that figure at 1m barrels.