http://business.scotsman.com/business/Driven-to-despair.4118168.jp

Driven to despair

A HOUSING slump across America; a global credit crisis; crashing banks and tumbling house prices; a food price spike, growing fears of recession, and now, just when you thought the news could not get worse, a new oil price super spike to more than $130 a barrel.
Any one of these developments would threaten a recession. Indeed, America's central bank is already struggling to stave off the worst financial crisis since the Great Depression. But together they put beyond doubt the fact that the world has moved from one era to another, and one altogether less stable and reassuring.

Deepening gloom in housing markets in America and Britain has hit directly at household wealth and the basis of the consumer borrowing and spending surge that has fuelled growth for the past five years. Soaring prices of raw materials and foodstuffs have sparked riots across the world and hit world's poor.

But the skyrocketing price of oil – up 60% this year, double the level of 12 months ago and up 400% on the level in 2001 – has wider and more painful consequences than a housing slump or dearer food. It risks making recession a fact across many parts of the world. It will force households into even further cutbacks, drive companies into retrenchment and put governments under intense and often destabilising pressure.

Across the economies of Southeast Asia, costly and elaborate government oil and food subsidies have protected millions from the worst of the price spiral. These subsidies are now likely to be drastically modified or swept away altogether, compounding the problems of poorer households.............

............. The oil surge is already having wider and more severe effects. Last week American Airlines said it was mothballing 75 planes and introducing a minimum baggage charge of $15 an item. Smaller airlines, such as business class airline Silverjet, will struggle to raise cash. Cheap air travel is fast disappearing.

Ford has slashed production of its gas-guzzler cars, while tens of thousands of smaller companies will have to quickly adapt – or go to the wall.

Every manufacturing company is now under the cosh of rising input prices. Indeed, even before the latest upward twist to the oil price, raw material costs for UK companies were racing ahead at an appalling annual rate of 23% – a pace not seen since the stagflation years of the mid-1970s..............

................ Today's oil supplies are not the driver. It is the belief that in the medium term we are facing a permanent oil shortfall. Veteran oil trader T Boone Pickens has predicted that oil could hit $150 a barrel within weeks. Goldman Sachs energy analyst Argun Murti, who correctly predicted that oil would smash through $100 a barrel, predicts the price of oil could now soar to $200 a barrel in as little as six months.

US economy analyst Ed Yardeni says "peak oil' theory, once on the fringe, has gone mainstream in the past few weeks as oil prices have soared to levels that only the peak oil theorists anticipated..........