Oil prices surge amid Hurricane Rita fears

The International Monetary Fund today warned that high oil prices could trigger inflation and push interest rates higher as Hurricane Rita threatened energy supplies in the Gulf of Mexico.

Oil prices in New York shot up $2 (£1.10) to $68.26 a barrel, creeping back up towards the record $70 seen in the immediate aftermath of Hurricane Katrina.

"The possibility that oil prices could trigger more general inflation, rising interest rates and affect housing prices is a real possibility," Raghuram Rajan, the IMF chief economist, said.

Oil prices have started climbing again amid fears that Hurricane Rita - which has been upgraded to the same level as Hurricane Katrina - will disrupt refinery capacity and drilling in the Texas region, aggravating the damage caused to refineries in Lousiana last month.

Texas, the heart of US crude production, accounts for 25% of the total US oil output. Rita is also thwarting recovery efforts as refineries gear up for the winter - the peak time for producing distillate fuels including heating oil, jet fuel, kerosene and diesel.

Numerous companies including BP, Shell, Apache, Exxon Mobil, Chevron Corp and Marathon Oil have abandoned facilities in the Gulf of Mexico as Rita threatens.

A large number of Texas refineries are located in the Houston and Corpus Christi areas, both of which could be hit by the hurricane.

With the US oil industry still recovering from Katrina, a further blow could send oil prices spiralling higher, despite a decision by Opec yesterday to make all its spare capacity - around 2m barrels a day - available.

"It doesn't matter how much crude you pump in - you won't have a meaningful effect on prices if you can't get refined product out," Justin Smirk, a senior economist at Westpac in Sydney, told Reuters.

Oil prices have fluctuated this week, putting on more than $4 a barrel on Monday but slipping back following the Opec meeting.

They peaked at $70.85 when Katrina swept through the Gulf of Mexico but later fell back to $63, contributing to the decision of retailers to cut some UK pump prices last week.