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Investment view

Should investors be concerned about the rise in the price of oil? Those with a long memory will recall the devastating effect that the fourfold increase in the price of this most essential of commodities had in 1973/74 following the Yom Kippur war. True, this was just one of a number of unfortunate occurrences that in the end unseated the Heath administration in this country but the resultant bear market would have given the new millennium&#39s dotcom crash a run for its money.

Buoyant economies use more oil. To reduce oil consumption requires an economic slowdown or greater efficiency in its use. While this is possible (witness how the US downsized in terms of cars during the late 1970s and early 1980s) it takes a while for the benefits to flow through.

The supply/demand balance is currently very tight. China has developed a voracious appetite as industrialisation continues apace. Much of China&#39s oil needs are met by Russia, which is fast becoming the world&#39s premier producer, but supply has been disrupted by the shenanigans surrounding Yukos, the giant oil company in dispute with the authorities. This uncertainty does not help keep a lid on the oil price.

Nor, for that matter, does the situation in Iraq. When production was halted last week because of fears that a terrorist assault on Iraqi facilities was imminent, the price experienced yet another surge. Opec has already indicated that it is not in a position to turn on the taps more fully. Even Saudi Arabia&#39s efforts have done little to calm nerves in this market.

Oil-refining capacity is creaking at the seams. The closure of a major plant even temporarily can only add to upward pressure on the price. Given the environmental issues involved, solving this problem through building more refineries is as fraught with difficulty as is persuading people to use less fuel.

Last week saw British Airways put up its fuel surcharge on flights by more than 100 per cent and petrol retailers warn of an impending further rise in the price at the pump. It seems we are learning to live with oil above $40 a barrel, previously considered a trigger point for slowing economic activity. Nevertheless, how we manage our oil consumption is becoming a political priority. It is even featuring in the manifesto of US Democratic presidential candidate John Kerry.

The beneficiaries in the investment world should be the oil companies. But important as they are in the composition of the FTSE 100, it is hard to build an investment strategy on a single sector, particularly one as vulnerable as oil. Even if fuel savings and economic slowdown do not restrict consumption, it is hard to see governments allowing the oil majors to profit indefinitely from this state of affairs. But we need to watch the price of oil carefully in the months ahead.

Last week&#39s report from actuarial consultantcy Watson Wyatt on the rising cost of meeting Government pension liabilities is a stark reminder of how retirement funding is affecting all areas of the economy. These are pay-as-you-go pensions, not funded as in the private sector. Yet they are liabilities nonetheless. Meeting them forms part of Government expenditure. Meeting them will cost £580m, according to Watson Wyatt. It amazes me that the inequality between those in Government-backed pensions and the rest of us has not attracted more attention. Council tax increases are as like as not to help meet pension deficits. We all pay for these schemes. Pensions could prove to be this administration&#39s poll tax.


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