Economic insight: $100 oil

With oil nudging $100 a barrel, Tony Shephard, investment analyst at Charles Stanley, considers the consequences of rising energy prices for British business

The consensus is that the supply of oil will not keep up with increasing demand, especially from China and India. Short term, prices have risen a lot on speculation and could come back down again. But in the long term, all studies indicate that prices will rise.

For British businesses reliant on oil, like airlines and bus companies, the weak dollar has offset some of the increased costs, so it’s not quite as bad as it appears. The biggest impact is on the economic landscape, since higher oil prices contributes to higher inflation and people eventually start demanding higher wages. That’s what happened in the 1970s.

Now a lot of heavy manufacturing has moved out to the Far East and the central bank has been more focused on controlling inflation than it was 30 years ago. Nevertheless, high oil prices still show up in airfares, petrol and utility bills. In Europe, the most recent consumer price index figures show an increase in inflation from 1.9 to 2.6 per cent. That’s quite a sharp jump and if it is maintained the European Central Bank might feel obliged to raise interest rates.

If oil goes through $100, it is a symbolic moment. If it stays there, it will accelerate investment in energy efficiency and alternative energy technologies. Higher oil prices do change people’s behaviour. However, it the price drops back to $40, then those technologies won’t be so cost effective.