EDINBURGH: This time last year, global equity markets were rising strongly in the aftermath of the Iraq war. There was relief at the short duration of the conflict and widespread confidence that the situation in the Middle East would improve. Oil prices were also widely expected to fall. Both expectations have been proved wrong. Tension across the Middle East is if anything higher. Fears of terrorist attacks on oil installations in the Gulf have helped propel the oil price to a 13-year high. Ironically, the one oil -producing country not enjoying any benefit from this surge is Iraq. And so much for those conspiracy theories that the U.S. only attacked the regime to engineer a fall in the oil price to help U.S. business. It is the failure of the coalition to have worked on a post-war strategy for Iraq that has helped drive the oil price close to all-time highs and to threaten world recovery. Dearer oil poses a direct and immediate threat to the industrial, transport and travel sectors of the Group of Seven advanced economies. It forces up key raw material costs for business. And it has a wider if more diffuse effect on the general level of inflation. There is now a hardening expectation that US interest rates will be raised next month, sooner than previously expected. And across Asian stock markets, prices fell sharply on concern that dearer oil could bring China's booming economy to a shuddering halt. As worrying for President Bush is the potential political impact of dearer oil: American consumers do not take at all kindly to rising prices at the pumps.
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Worrying though this slide in confidence is, the situation by no means justifies a blind sell-off. Dearer oil in time works in much the same way as an interest-rate hike and should mitigate the pressure for further rises later in the year. More immediately, the leading OPEC producer Saudi Arabia called yesterday on the oil cartel to raise supply limits by at least 1.5 million barrels a day, or just over 6 per cent, to prevent high prices derailing global economic growth. There is talk of an output increase of as much as two million barrels a day at the next OPEC meeting scheduled for 3 June.
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The Saudi call helped to cool the oil-price frenzy yesterday. But much now critically depends on the US-led coalition getting a grip on events, rather than being caught almost every day at their mercy. The Scotsman
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