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Oil prices to dominate weekend G7 talks

The threat of an oil price shock destabilizing a global economic recovery overshadows a meeting this weekend of G7 financial leaders.

"The subject of oil will certainly come up in our overview of the macroeconomic forces that are affecting the world economy," US Secretary of the Treasury John Snow told reporters here.

"Higher oil prices are not helpful from the point of view of the agenda for growth. They act like a tax, reducing the disposable income that is available for other purposes," he said.

Snow hosts a gathering in New York this weekend of finance ministers from the G7 -- Britain, Canada, France, Germany, Italy, Japan and the US -- at a time of soaring energy prices.

World oil prices neared record highs Wednesday amid bloodshed in the Middle East and US President George W. Bush's repeated refusal to release emergency oil reserves.

New York's benchmark light sweet crude for June delivery soared US$0.96 to US$41.50 a barrel, US$0.05 shy of the record close set Monday for the 21-year-old futures contract.

Gasoline roared US$0.634 higher to a record close of US$1.4503 for a gallon of regular unleaded to be delivered in June.

"This is a real, live, honest-to-God bull market," said AG Edwards director of futures research Bill O'Grady.

"If this market is going to go down, it is going to happen because of a change in psychology," he said.

Traders said oil was supported by Bush, who repeated his policy of refusing to release oil from an emergency reserve to lower record gasoline prices, saying it would weaken the country in its "war on terror."

Adjusted for inflation, oil prices remain far below the peaks set before the 1991 Gulf War. Analysts generally believe they would have to rise much further to actually interrupt the world recovery.

Analysts say the possibility of much higher prices cannot be discounted if an attack in the Middle East were to interrupt supply from a major exporter such as Saudi Arabia.

"The major concern might be a serious disruption to the supply of crude oil from the Middle East that could do considerable damage to the world economy. That is going to be one of their primary con-cerns, I would think," said John Lonski, Moody's Investors Service chief US economist.

"That is perhaps the biggest danger facing the global economy [in the] near term," he said.

Oil prices could fall, however, if confidence returned in Middle East security.

"If it turns out that there are developments that diminish that perceived risk of supply disruptions, then we will probably see crude oil prices subside quickly," Lonski said.

Wachovia Securities global economist Jay Bryson agreed that oil would dominate the G7 meeting in New York.

"The major concern is probably going to be the price of oil, what effect is that going to have on the global recovery if oil prices stay at these sorts of levels or even go higher," Bryson said.

Industrialized powers likely would ponder how to cut oil prices, either by encouraging more output from oil producers or possibly by examining ways to lower consumption, he said.
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