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Pump it up

Consumers are being hammered by the effects of big increases in the price of oil. kate mallord assesses whether there are further rises already in the pipeline or if a rise in production and fall in demand next year will bring some respite

Blockades, utility prices soaring, air travel surcharges and petrol pump hikes. These are just the first outcomes of a rocketing oil price that saw the price of West Texas Intermediary reach a record $135.09 a barrel recently.

The hardest-hit businesses so far have been airlines. Business-class-only carrier Silverjet has stopped flights and many airlines operators have slapped on fuel surcharges.

Passing the costs to the consumer seems to be the only way that many companies can cope with the dramatic spike in fuel prices. According to Energy Watch, the average annual household bill for heat and light is now more than £1,000.

Motorists are also paying for the oil price rises. In May, the average price of petrol hit 116p a litre with diesel rising to 124p a litre.

Why is the price rising so steeply? The finger has been pointed at speculators.

JP Morgan natural resources fund manager Ian Henderson says: “There has been a bit of a sell-off. People have made profits and the marginal buyer or seller has a got a disproportionate influence on contrary prices.

“It is entirely possible that we will see oil drop below $100 a barrel for a day or two this year but it will not be for an extended period of time.

“On the back-of-anenvelope calculation, total global oil reserves run to something around two trillion barrels of oil and we will have used up most of those in 40 years.”

However, other market commentators believe there could soon be a turning point down for the oil price with production rising and demand easing.

A recent report by Lehman Brothers says: “Through 2009, global production capacity should be growing at twice the rate of global demand.”

It claims the temporary spike in demand from China will subside once the Olympics and the rebuilding of Sichuan has concluded.

Lehman also believes that the potential has been underestimated for Saudi Arabia, Nigeria and Northern Iraq’s to sustain and increase production. It adds that there could be a 10 per cent growth in Russian production due to a new domestic tax relief for the oil sector.

But BlackRock fund manager Robin Batchelor says: “The outlook for oil prices remains strong. China today consumes as much crude oil per person as the US did in 1905, before mass production of the Model-T Ford and long before the advent of the jet engine. If China and India were to increase their consumption per person to current US levels, these two countries alone would require 160 million barrels per day, more than twice the world’s supply of oil today.”

Henderson comments: “The oil industry is being disincentivised to spend money to replace reserves. They cannot get into countries like Saudi Arabia.

“Despite Imperial Energy’s successful drilling in Western Siberia, Russia’s oil production is falling and UK North Sea oil production is likely to fall. Venezuela is down due to incredible mismanagement and Nigeria has got civil conflict. It makes me cross to think that people can even imagine there is not a serious problem.

“Saudi Arabia is building its own industrial base, which includes heavy smelters, so, as far as I can understand, every single barrel that is going to come out of Saudi Arabia is going to be used domestically.”

Lehman believes offshore explorations have future potential, such as Santos in Brazil, but Henderson says: “The best hope for the Santos base is that they might be producing enough oil by 2012.”

Henderson does not hold much hope for future price reductions. “The issue is really that we are having to go to more and more difficult places, such as deep-sea offshore, which is incredibly expensive and dangerous.

“Oil consumption is forecast to go up by 50 per cent in the next 20 years. To replace those oil reserves, it costs something on the lines of $20 a barrel, so you are talking about investing something like $80 trillion. I just do not see where the money is going to come from.”

The high cost of oil is also driving up the cost of food, with the British Retail Consortium reporting a 6.4 per cent increase in food prices in May, much of which it attributes to increasing fuel costs.

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