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Investment view

Two sectors in which it would have been sensible to invest in recent weeks are oil and technology. You can add media to that as well but the resurgence in demand for new economy stocks did not extend as far as telecommunications. The fancy sums being paid for new generation mobile telephone licences have unnerved some investors, so the likes of Vodafone have been languishing somewhat. The bounce in technology and media was very dramatic, though, and this part of the market seems set to maintain its volatile progress for the foreseeable future.

Oil, on the other hand, has been giving cause for concern as well as delivering profits to the shareholders. The price of oil has more than trebled in less than 18 months. The knock-on effect includes such dramatic gestures as blockades of oil depots and British holidaymakers (including me) finding it difficult to return from France because of the action taken by lorry and coach drivers.

But the real worry is the effect that higher oil prices might have on the world economy. If energy costs rise, then a dampening effect upon economic activity seems inevitable. Moreover, higher fuel costs will not do inflation much good either. A combination of more expensive energy and rising interest rates – if central banks endeavour to step in to dampen inflationary fires – is not a comfortable thought. The big question is, are the fears of those who point to rising oil prices as a real threat to financial markets justified?

At the end of the 1970s, the price of oil rose to $40 a barrel. Given that it had not been much more than a tenth of that less than decade earlier, prognostications at the time were pretty gloomy. Yet we tend to be very adaptable. Expensive oil produced some interesting side-effects, such as the way in which it became possible to extract oil from other sources where the costs involved would otherwise have been prohibitively high. Even more important was the drive towards energy efficiency that took place pretty well everywhere except North America. But the short-term reasons for the higher oil price – in this case the Iran/Iraq war – subsided and the price settled down to a more acceptable level.

A decade ago, the Gulf War drove the oil price up again but since then there has been a degree of equilibrium between supply and demand. Indeed, it is probably fairer to say that the sub-$10 price to which oil plummeted during 1998 was an aberration and that a more appropriate price for oil is in the mid-$20s. That is certainly what Opec appears to wish to achieve. Rather perversely, Opec could also suffer if demand is stifled by a long-term period of expensive oil.

Back in the early 1970s, when the first big oil crisis hit, I recall analysts forecasting that the world&#39s oil reserves would be exhausted by the turn of the new millennium. Well, here we are and there is still plenty of it about. What is more, we are using it just as freely as ever we did. Alternative energy sources have really made surprisingly little impact over the last quarter of a century. There will be money to be made from the oil sector for a few years yet.

It seems that the hedge fund story is catching on. In figures produced last week, we learned that, over a period of six years, the amount of money committed to this so-called alternative investment product has quadrupled to more than $200bn. According to Tass Investment Research, two-thirds of this increase was due to fund performance and only one-third – or $50bn – a result of new money flows. Now you know why they are becoming increasingly popular. Expect to hear still more about hedge funds.

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