Some of the recent rise in the cost of oil will not last, but high prices are here to stay, the governor of the Bank of England, Mervyn King, warned today.
His comments followed this week's hike in crude prices to just below $71, caused by Hurricane Katrina tearing through the Gulf of Mexico and forcing at least eight refineries to shut down as well as hitting oil production.
Today oil prices eased back to $69 a barrel following the US decision to dip into its strategic petroleum reserve.
Amid warnings from the Petrol Retailers' Association in the UK that higher oil prices will push forecourt prices to £1 a litre, Mr King said: "Some of the increases in the last couple of weeks are almost certainly temporary but the big increase in price over the last year will remain."
In an interview published in the Belfast Telegraph, Mr King said: "Those increases are the result of strong global demand for oil, particularly from China, and the price of oil futures shows that the markets do not expect an early revision to the low oil prices we had got used to a couple of years ago."
US crude is up nearly 10% over the past two weeks and 57% over the past year. Brent crude, trading near $67.25 today, has risen 62% over the past year.
Mr King was reported as saying that the cost of fuel would push up inflation in the short term and reduce consumer spending power.
The Bank of England has pointed out that high oil prices have less of an impact on inflation than in the past through a combination of more efficient energy use and a smaller manufacturing sector, which relies heavily on oil.
The annual inflation rate rose to 2.3% in July, its highest level since Labour came into power in 1997 and above the Bank's 2% target.
For its part, the European Central Bank raised its inflation forecasts for this year and next, noting soaring oil prices were pushing up the cost of goods and services. The ECB raised its projection for the crude price by $12 to $62.8 a barrel in 2006.
Despite the US decision to tap into its oil reserves, traders say it will make little difference to petrol prices as the immediate problem is not so much a lack of crude oil as a shortage of refining capacity to turn crude into a usable form for consumers.
"Hurricane Katrina has been an eye opener, highlighting the inadequacy of the global refining system," said Merrill Lynch.
France announced it would give financial aid to millions of families to help them cope with the knock-on effects of high oil prices, and promised to boost renewable energy.
"We have entered the post-oil era," the French prime minister, Dominique de Villepin, told a news conference.
Katrina, which may have killed hundreds as it hit the US Gulf coast on Monday, has shut down refineries along with 91% of Gulf of Mexico crude production and 83% of gas output, the US Minerals Management Service said yesterday.
The impact of Katrina would be seen mostly in refining crude oil into petrol, not in pumping crude, the US department of energy said.
"Unlike Hurricane Ivan - which was a major hurricane that affected oil facilities last September and had a more lasting impact on crude oil production in the Gulf of Mexico - it appears that Hurricane Katrina may have a more lasting impact on refinery production and the distribution system," a department statement said.
Further potential supply disruption could come from Nigeria, where the main workers' union has threatened a strike.
Energy markets have been under pressure for around two years because the amount of excess oil production capacity worldwide is only about 1.5m barrels a day, or less than 2% of demand.
Although oil prices are more than 50% higher than a year ago, they would need to reach $90 to surpass the inflation-adjusted high set in 1980.
