IN the 1970s, soaring oil prices were blamed for pushing the world into recession. As crude oil reaches as record high, Nick Morrison looks at what this means for petrol prices - and whether another recession could be in the offing.

SPEED limits were reduced to save fuel, with experts estimating that a five mile-an-hour reduction would save £10m; restrictions were placed on heating both in the home and in offices, and the use of electricity for outdoor advertising and display was heavily curtailed.

It was 1974 and the Government was forced to introduce a 12-point plan to conserve energy as the price of oil soared.

Thirty years on, the price of oil has again reached a record high, trading at $53 a barrel in New York yesterday. The immediate cause was a two-day strike in Nigeria's oil fields, but the latest rise is just one of a series of record highs.

The record oil prices are the result of strong demand pressures at the same time as there are problems in the supply of oil, says Tony Cockerill, professor of economics at Durham Business School. And one of the principal factors in the level of demand is the rapid expansion of the Chinese economy. Combined with the healthy state of the American and European economies, and the recovery in Japan, there is a synchronised upswing of demand, Prof Cockerill says.

As for difficulties in meeting that demand, Iraq is clearly the main problem. As one of the world's largest oil producers, its output has been badly affected by the events of the last 18 months. Uncertainty over the medium-term stability of Saudi Arabia has also caused jitters in the oil market, he says.

"Although in normal circumstances the capacity ought to be there, there are both limitations on output and uncertainty about whether or not output would be able to keep pace with demand," he adds.

The most immediate and obvious effect is on petrol prices. Motorists are now paying an average of 5p a litre more at the pumps than at the beginning of the year, and the latest rise has prompted fears that prices will go even higher.

And as motorists have less cash to spend after shelling out more for petrol, while more expensive oil increases the costs to industry, analysts are now looking at the possibility of an economic downturn.

'It is a direct squeeze on disposable income, and as personal income is squeezed there is less spending power in the economy," says Anthony Platts, assistant director of Teesside stockbrokers Wise Speke. "And for companies using oil, profit margins are squeezed.

"With less money going around the economy, at first it is deflationary, but if it goes on for a long time then companies using oil increase their prices, because otherwise their profits are going to be squeezed, and that feeds into retailers, because the cost of getting goods to shops goes up."

He says when employees see prices going up, they demand wage increases keep pace, leading to an inflationary spiral last seen in the late 1970s, when both inflation and wage demands topped 20 per cent.

"We're still in the first stage of that now, where wage inflation has not kicked in yet, but it has crept up on us fairly quickly.

"There will be a point in a few months time when oil prices haven't fallen back, and there is nothing to say that they would, and companies will be trying to maintain their margins, where we might see inflation taking effect," he adds.

The low underlying inflation levels of the last few years means inflation won't reach the heights of the 1970s, Mr Platts says, and so far the markets seem to be taking the oil price in their stride, as company profits stay healthy. But the increasing demand for heating oil over the winter, particularly in the United States, means it may be next year before the price of oil starts to drop.

As well as higher costs in the shops, as industry passes on its cost increases, airline fares could rise as aviation fuel becomes more expensive, with an expected knock-on effect on next summer's package holidays.

But while the price of domestic heating oil and diesel may rise and stay up, for petrol the short-term rise is likely to be followed by a fall, according to Ray Holloway, director of the Petrol Retailers' Association.

"Obviously the cost of petrol on our forecourts is associated with what crude oil costs, but they're not directly linked. They're sold in their own markets and that subjects them to different pressures," he says. "And at this end of the year, when we're using less transport fuel, then the prices are more apt to fall rather than rise."

He says the rise in the price of petrol has more to do with interruptions in the production of oil in the US, caused by Hurricane Ivan, than with any long-term difficulties. Once production is back to full capacity, prices are expected to fall.

"We're likely to see domestic heating oil and diesel prices go up and remain quite robust; petrol we will see go up and then by the end of October it will go back down again. It is not going to get back to 75p a litre, but it is going to go down to 80p.

"People do less driving in the winter months and demand falls away, so consumers can be reasonably sure that the prices are not going to move too far towards the end of the year," he says.

Record crude prices are not all bad news for the UK economy, says Prof Cockerill, and the most obvious advantage is that as a net oil exporter, the UK can expect to benefit from greater revenues.

And although $50 a barrel may be a record, in real terms it is lower than its peak in 1978: to match that level in relation to general prices it would have to be $100 a barrel, he says.

"In real terms, oil prices are not as high as they were 30 years ago, and in those 30 years we have become more efficient at using energy and the oil requirement of the economy has been less than it was, as manufacturing and heavy industry becomes less important," he adds.

The weakness of the dollar also lessens the effect of high oil prices, but there may be an adverse effect in increasing inflationary pressures. This may persuade the Bank of England to raise interest rates, but this could cause serious problems.

"The risk is if interest rates go up, it will reduce the rate of growth in the economy, and we could then see job losses and maybe not a recession, but certainly the economy could slow down," says Prof Cockerill.

He says while there is no indication yet of a major slowdown, if the Chinese economy were to falter, then the consequences would be felt throughout the world economy.

"I'm not pessimistic at the moment. This could knock a bit off the rate of growth, but it is not going to tip us into a mid-70s recession. If there are no major escalations in the political risk, in what is happening in Iraq and Saudi Arabia, then oil prices ought to begin to fall, but you never know what is going to happen," he says.