Higher oil price could affect recovery, warns IEA

In July 2008, the price of oil reached $147 dollars a barrel - its highest dollar value.

Barely two months later, the world was engulfed by what many argue was its worst financial crisis since the Wall Street Crash and Great Depression.

Now, the price of oil is again climbing steadily upwards, and has reached $95 a barrel.

Fatih Birol, the chief economist of the International Energy Agency, has warned that oil prices are entering a "dangerous zone" for the global economy.

On the BBC's World Business News, Alex Ritson asked him what he meant:

Transcript is below

Fatih Birol: Oil is one of the most important inputs to the economy. If the oil prices go up much higher than what we have been seeing in the markets, this would mean that the budget of the households in terms of more expenditure for travelling or for other energy purposes, this would mean that their income will be less, and there will be a stronger pressure on the inflation numbers.

Alex Ritson: What do you think is pushing the price of oil upwards?

Fatih Birol: I think there are at least two reasons. One of them is that the market players believe that the demand growth will be very strong this year, mainly driven by China and secondly there is a reluctance, many commentators observe, from the producing countries to increase the production, therefore expectation of a tightening in the markets lead to increase in the prices.

Alex Ritson: And yet when normally when prices go high, oil producing countries deliberately switch on the taps, they make as much oil as they can while prices are high. Normally these things are self-correcting, then the price comes down.

Fatih Birol: I hope that we will see a development as you just described, but some of the indications tell us that some oil producing countries may not be as generous as they have been in the past. And if they don't do so, it may well mean that we will see higher prices which in fact is not a good news definitely for the consuming nations, but I believe it is not a good news for the producing nations at the end of the day, because if the economies of the main clients/consumers are sick, they will also need to slow down the exports to those countries.

Alex Ritson: Just before the height of the financial crisis in 2008, in July of 2008, before it all went off, oil prices reached $147 a barrel, in nominal terms the biggest number ever. Do you think that that had something to do with the crash that followed?

Fatih Birol: I think the high oil prices in 2008, they were not the primary reason for the financial crisis, but they played a significant role in the run-up to the financial crisis by weakening the trade balance of many economies, by weakening the income levels of the businesses and the households. And we shouldn't forget that in 2008, the average oil price for the year was $90; yes it was $147 for a day or so, but $90, and today the level of price we have in the markets is also $90. So we are not very far in average terms from those really, if I may say so, catastrophic conditions of 2008 as far as the oil prices are concerned.

Alex Ritson: Does that mean you think we are heading for another crisis?

Fatih Birol: I hope not. I hope that the producers as well as the consumers behave logically in order to avert such a thing.

Alex Ritson: Okay. You hope not, but do you fear that that may be the case?

Fatih Birol: There is definitely a risk that we may face higher oil prices which could end up with major negative implications for the global economic recovery.

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