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Facing Up To The Price Of Oil -
“The rise in energy is semi permanent” The increase in the price of oil over recent years, particularly the last year, has been staggering. On 16th June the price hit yet another record of almost $140 ($139.89) a barrel. A year previously it was $68, so it’s an increase of 106% in just twelve months. Over the five years to 16th June we had a 352% increase, from $31 on 16th June 2003. Analysts are predicting prices as high as $200 a barrel. Here in Spain the cost of fuels and lubricants for personal transport rose 20% over the last year and housing costs (including gas and electricity) 6.6%. Is it time to accept that high oil prices are now part of life and not an aberration? The price of oil reflects total world demand and total supply by the oil-producing countries. The primary demand for oil is as a transport fuel, with lesser amounts used for heating, energy and as inputs for petrochemical companies like plastics. The increasing demand from all countries, particularly from emerging market economies like China and India, is an important force pushing up the global price. This comes at a time of continuing production problems in a number of oil-producing nations. There have been various warnings that the price could surpass $200 a barrel, including from OPEC itself. The energy strategist at Goldman Sachs, says surging demand is increasingly likely to create a “super-spike” past $200 within six to 24 months and Economist Jeff Rubin explained that production will barely grow over the next five years and the increases could fall short of demand, leading to $150 barrel oil by 2010 and $200 by 2012. Nobel prize-winning economist Michael Spence of Stanford University has also warned that skyhigh volatile prices in oil, food and various minerals are now perennial features of modern economy - and “a consequence worth suffering” of globalisation. “It would be a mistake to view this as a one-time phenomenon… I would be very surprised if the relative price of oil and gas fell to the level it did in past years. The rise in energy is semi-permanent”. It looks like we’ll have to get used to higher petrol prices at the pump and energy costs for our homes. It also appears that we’ll need to learn to accept higher food prices. Increasing global demand is one reason for this. The high price of oil is of course another contributing factor – besides transportation costs oil is a prime ingredient in fertilizer. Inflation should always be an important consideration of your financial planning, especially if you are retired, and the threat is now more serious than it has been since the 1970s. If you haven’t previously given it much consideration you certainly need to plan for it now – your capital and income structures should be set up to accommodate the rise in the cost of living or you will suffer a significant drop in spending power in the future. Your financial adviser will advise on investment structures to help you beat inflation. With inflation wiping out bank interest returns in many cases and no capital growth potential, a bank deposit account is not a sufficient safeguard. To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranksinternational.com Bill Blevins, Financial Correspondent, Blevins Franks |