Fuelling the debate

'I fear we may have to live with expensive petrol for some time yet'

I cannot imagine anyone missing the direct effect that the higher price of oil is currently having on this country. Personally, I feel a little miffed. Having been delayed in France because of lorry drivers blocking the route home, I rather thought we might escape the worse excesses of the protests against higher fuel prices. But given that petrol is even more expensive here than it is on the other side of the channel, I suppose it is no wonder that British hauliers gave vent to their feelings.

I cannot imagine anyone missing the direct effect that the higher price of oil is currently having on this country. Personally, I feel a little miffed. Having been delayed in France because of lorry drivers blocking the route home, I rather thought we might escape the worse excesses of the protests against higher fuel prices. But given that petrol is even more expensive here than it is on the other side of the channel, I suppose it is no wonder that British hauliers gave vent to their feelings.

It is one thing to be inconvenienced by these protests, but the real question is whether dearer energy will have a serious knock-on effect on the economy. The rapidity with which the oil price has bounced has added to the upset. In 1999 oil dipped below $10 a barrel. In eighteen months it has multiplied three-fold.

The first major oil shock that followed the Yom Kippur War in 1973 all but brought the economy of this country to its knees. Oil quadrupled in price and contributed to a massive rise in the rate of inflation. In today's global market, higher fuel costs are more difficult to pass on in the form of higher prices. True, inflation will be affected because of the rise in the cost of petrol, but it is corporate profits that are most likely to be dented.

This is not an encouraging scenario, although we should put the current oil price into historic context. For a start, we are still below the level reached 20 years ago when the Iran/Iraq war disrupted supplies and Brent crude flew to over $40 a barrel. It is probably more sensible to argue that the sub-$10 price reached last year was the aberration, rather than the recent push to over $30 a barrel.

It is worrying that OPEC's announcement of an increase of 800,000 barrels a day had no real effect - they have however indicated that they can increase still further the supply of oil, so perhaps one should not become too concerned. The tightness of supply does though highlight that the world economy is buoyant and that the additional demand now coming from developing countries looks likely to put increasing pressure on supply in the future.

The real problem remains the level of tax exacted by governments, which has always seemed an acceptable way of raising revenue because it should, in theory, encourage people to become more fuel efficient. It is also easy to collect and contributes mightily to the Exchequer.

Unlike in France, it is hard to see our current government bending under the pressure, so I fear we may have to live with more expensive petrol for a little while yet. Still, the reaction does appear overdone. Fossil fuels will not be with us forever and renewable energy sources will enjoy an increasing amount of attention. Those who forecast a pull-back in the oil price to below $20 a barrel earlier this summer are no doubt now realising that the supply/demand ratio is too tight to call. But equally I consider it unlikely that oil prices will continue to rise or that there will be dramatic consequences for our economy.

* The writer is the Chairman of the Greig Middleton Asset Allocation Committee

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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