The managing director of the International Monetary Fund warned Tuesday that a sudden spike in oil prices would have "serious consequences" for the global recovery.
As Christine Lagarde made her comments, the trade group for the global aviation industry warned airlines could run up losses of over $5 billion US this year if oil prices jump to $150 US a barrel because of Western tensions with Iran.
As well, the Financial Times reported that Saudi Arabia has hired the largest number of super tankers in years.
Over the next couple of weeks, the report said, the ships will load at the port of Ras Tanura, the world’s largest oil terminal, and begin deliveries of what it described as "a wall of oil," due to arrive 40 days later at the US Gulf coast.
Oil prices, which have climbed by 9.3 per cent since January, retreated today after Saudi Arabia promised to keep markets well-stocked with petroleum.
The April contract for light sweet crude expired down $2.48, or 2.3 per cent, at $105.61 US a barrel. That’s still close to seven-month highs.
The May contract for the European benchmark, Brent, traded lower by $1.55, or 1.2 per cent, at $124.16.
China hikes fuel prices
Saudi Arabia, the world's biggest oil producer, made its announcement earlier Tuesday in reaction to fears that a standoff over Iran's nuclear program could hurt oil supplies from the Middle East.
Prices also fell on expectations the U.S. government to report tomorrow that inventories of U.S. crude last week rose for a fifth week, and after the China Association of Automobile Manufacturers warned the industry might fall short of sales projections, raising concerns about future demand.
Concerns about slowing Chinese growth also pushed the U.S. dollar higher, which creates downward pressure because oil is priced in American dollars.
But the longer-term worry is that prices are headed higher.
China, the world’s biggest oil consumer, increased fuel prices for the second time in less than six weeks, and by the most in two years.
And Lagarde said that crude prices could soar by between 20 to 30 per cent, if the West imposes an embargo on Iranian exports over concerns about its nuclear program.
Kuwait's ruler, Sheik Sabah Al Ahmed Al Sabah, said Tuesday Iran has assured its Gulf neighbours that it will not block the vital Strait of Hormuz, a shipping chokepoint at the edge of the Persian Gulf through which a fifth of world's oil supplies pass.
He said, "We have received assurances from Iran that it will not take this step."
Iran has threatened to close the strait in retaliation for Western-led efforts to thwart its nuclear program.
The International Air Transport Association, or IATA, says it now expects airline earnings will likely decline to $3 billion in 2012.
That's down from December's forecast of $3.5 billion, based on an expectation that oil prices will average $115 a barrel.
Although Saudi Arabia has pledged to act to make up for the lost Iranian supply and bring prices back down to "fair" levels, it would take some time for it and other exporters to make up the shortfall.
As well, the crisis in Libya last year has already tightened global supplies.
High oil prices have become an issue in this year’s U.S. elections.
Amid heightened tensions between their nations, President Barack Obama on Tuesday made a direct appeal to the Iranian people, saying there was "no reason for the United States and Iran to be divided from one another."
Obama rebukes Iranian government
In a video message marking the Persian new year, known as Nowruz, Obama said the U.S. seeks a dialogue with the Iranian people in order to hear their views and understand their aspirations.
He sharply rebuked the Iranian government for setting up an "electronic curtain" around its people that the U.S. says blocks access to much of the outside world.
"Increasingly, the Iranian people are denied the basic freedom to access the information that they want," Obama said.
"Instead, the Iranian government jams satellite signals to shut down television and radio broadcasts. It censors the internet to control what the Iranian people can see and say. The regime monitors computers and cellphones for the sole purpose of protecting its own power."
Obama’s energy policies have come under criticism from Republican candidates as the average gasoline price crept up to the range of $3.80 a gallon, nearing the record nominal high of $4.11 set in the summer of 2008.
Gasoline price tracking website GasBuddy.com reported the average Canadian price for regular was $1.29 a litre Tuesday, up more than six per cent from a year ago.
The White House announced Monday that Obama would visit Cushing, Okla., the southern starting point of Calgary-based TransCanada's controversial Keystone XL pipeline, on Thursday.
The move comes as the administration’s previous opposition to the entire pipeline appeared to be shifting.
Keystone XL would carry more crude from the Alberta oilsands to the U.S, and would also help release a glut of crude bottled up in Oklahoma because of insufficient pipeline capacity to refineries in Texas.