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Costello warns of 'oil shock' -

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(generated from captions) As the price of crude oil hit another record overnight, the Federal Treasurer Peter Costello says the world is living through another oil shock. He's compared it to the global fuel shortages in the 1970s. Mr Costello has warned that Australia needs to be careful that petrol prices don't set off a wave of inflation. Economists in the US are also keeping a close eye on the impact of fuel prices there. Rachel Carbonell reports. Worries over supply from Iran and Nigeria caused crude oil prices to surge again overnight - this time to new record highs of more than US$71 a barrel. The price of petrol in the United States has again hit US$3 a gallon, and the President is worried.

I'm concerned about higher gasoline prices. I'm concerned what it means to the working families and small businesses. But perhaps not as worried as President Ronald Reagan was during the world oil shortages of the 1970s, when Americans were queuing for hours to fill their tanks. NEWS REEL: There's no need for panic or panic buying along lines we've seen on TV. But as prices reach almost $1.40 a litre in some parts of Australia for the second time in a week, the Federal Treasurer is calling this the third world oil shock and comparing it to the 1970s crisis. We're living through a very difficult time here. We're basically living through another oil shock. World oil prices are at all-time records.

The first two oil shocks back in the '70s set off a wave of inflation. We have to be absolutely vigilant that this oil shock doesn't set off a wave of inflation. He's warning businesses not to be tempted to pass fuel costs on - for the sake of the economy. I believe we can contain it, as long as businesses that use petrol don't use that as an excuse to move secondary prices

'cause then you would get a second movement back into the Consumer Price Index. Economists in the US are also keeping a close eye on the impact of fuel prices on the economy. Fundamentally, money you spend at the gas pump is money you don't have available to spend at the shopping mall or at the grocery store or at the restaurants you go to. So it's going to squeeze other consumer spending and that's going to squeeze the economy. Chief economist with BT Financial Group in Australia, Chris Caton,

says world economies are far better placed to absorb high fuel prices now than they were 30 years ago. It is very unlikely that this oil price rise will put the world economy or any significant part of it into recession, in part because the oil price rise is mainly being caused by strong world economic growth. He says it would be surprising if the situation got as bad as it did in the '70s. The risk at the moment, I guess, is that the Iran-US situation deteriorates further and the oil price spikes further from here, say to US$100 per barrel. That would finally have an effect on world economic growth and the knock-on effects of that on the Australian economy could be severe. But even in that case, I think it would be less severe than either the OPEC 1 or the OPEC 2 episodes. The Opposition says the international political tensions pushing up the price of petrol aren't going to go away any time soon. We're going to have high oil prices now till hell freezes over, so what we've got to do is go down the alternative road. How Australia's Reserve Bank reacts to the latest oil price movements will be revealed after its board meeting meeting next month. Rachel Carbonell, Lateline.