Britain is facing an 'economic crisis', a minister warned last night, as soaring oil prices threatened to pile £700 onto the average family's annual fuel bill.
In a frank assessment, trade minister Baroness Vadera said the UK was facing a 'very testing period'.
Yesterday, in the latest blow to the cost of living, the price of oil soared to a record high, hitting $135 a barrel and leaping by $5 in just 24 hours to more than twice what it cost a year ago.
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Price hikes: Prices at the pumps will continue to rise for the next eight years
Motoring organisations said it heralded a 'summer of misery' and would mean petrol prices going up by two-and-a-half pence a litre within four weeks.
As well as increasing pain on squeezed households, business leaders warned companies were being pushed to the 'absolute edge' by the rising prices.
The crisis will pile pressure on Gordon Brown, who has blamed Labour's collapse in the polls on the 'hurt' felt by ordinary families.
The Prime Minister is now under mounting pressure to scrap a planned 2p rise in fuel duty and abandon plans to increase road tax.
Some campaigners are demanding that he not only abandons future rises, but cuts duties using soaring revenues from oil prices.
Fuel protesters are preparing for fresh action next week over the highest fuel taxes in Europe, and probably the world.
Some 57p of the cost of a litre of petrol in Britain is tax, compared with 31p in Spain, 45p in Italy, 48p in France and 52p in Germany.
City accountants Grant Thornton say the Government could afford to slash fuel taxes at the pumps by up to 9p a litre thanks to the oil tax windfall swelling Treasury coffers by £5billion.
The oil price crisis will be at the top of the agenda on Friday when the Prime Minister holds talks at Downing Street with the Prime Minister of Qatar, the Gulf state which will provide 20 per cent of UK gas supplies by 2010.
Baroness Vadera, a close adviser to Mr Brown and a former investment banker, said: 'We are facing a very testing period in the economy. It is the first real economic crisis of globalisation.
'With a small start in Texas, the global credit crunch is combining with international prices, and this is also impacting on food prices.
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Costly: More misery for drivers and householders across the UK looks to be on the cards with the latest big jumps in oil prices
'We are facing a rather uncomfortable situation caused by the global liquidity squeeze still being worked through in the US, and rising world commodity prices, but I strongly believe that the UK is relatively well placed to face these challenges.'
With increasingly gloomy forecasts from economists, she urged people not to 'fall into the trap of talking ourselves into a recession'.
But the oil crisis is pushing up prices in almost every area of British life.
Families are facing higher bills for food and power as well as holiday flights, while hauliers transporting food and goods face every higher costs.
Motorists have endured a 30 per cent hike in diesel and 19 per cent rise in unleaded in a year.
On Thursday petrol hit a new record of 113.98 pence per litre, diesel at 126.35p.
The price-comparison website PetrolPrices.com expects unleaded to hit £1.50 a litre by the autumn.
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Inflated: An investor monitors commodity prices. Traders pushed oil futures up to $140 a barrel
AA president Edmund King said: 'The leap in the price of oil will add potentially another 2.5 pence to the price of petrol.
'The threat of even higher prices in the pipeline will perch like a vulture above UK forecourts waiting to pick an even bigger hole in the pocket of drivers and consumers.'
Air passengers are facing rocketing fuel surcharges - now paying £158 extra on a return transatlantic BA flight.
Household fuel bills are expected to rise by 50 per cent this year - with dual-fuel gas and electricity bills rising by £433.
And grocery bills are soaring by up to 19 per cent - contributing to the biggest increases in food prices for a generation.
Business leaders, meanwhile, say they will have no option but to pass more of the extra costs they face on to consumers.
The CBI said nearly a third of the 540 firms surveyed this month said they expected to put their prices up over the next quarter - the largest number for 12 years.
Ian McCafferty, the CBI's chief economic adviser, said: 'Manufacturers are really feeling the impact and having to pass their increasing costs on.'
British Chambers of Commerce policy head Chris Hannant called for urgent action, warning oil is around double the cost of 12 months ago.
Mr Hannant said: 'Oil prices hitting new highs of 135 dollars a barrel is pushing businesses to the absolute edge.
'Something needs to be urgently done or increasing numbers of companies will be left with no choice but to pass extra costs onto customers.
'Sending a positive message to business would make a huge difference and the Government should start by announcing that they are scrapping the next 2p hike in fuel duty.
'The Treasury is already receiving a massive windfall from above expectation oil prices, which makes any extra fuel levy totally unjustifiable.'
Labour MP Lindsay Hoyle also urged the Government to scrap future fuel duty rises and called for windfall tax on oil firm profits.
'People have to be able to afford to use the car,' he said.
'You can see people's faces looking at the clock as it's ticking away merrily and it's the sheer expense now of taking your car out and of road transport.'
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