Fuel crisis Q&A

The Times: Fuel crisis Q&A

April 30, 2008

Why do oil prices keep on rising?

Oil is becoming scarcer and harder to produce. Several former big areas of oil production are in decline while other top oil-producing countries, including Nigeria, Russia, Saudi Arabia, Iran and Venezuela, are either unwilling or unable to lift production. Chinese demand is expected to more than double by 2030. Hedge funds and investment banks have been placing big bets that oil prices will continue to rise, amplifying the volatility in prices.

Is petrol rising in tandem with oil?

In general, yes, although there tends to be a time lag of four to six weeks between increases in global crude prices and the price on forecourts.

Is the price pressure the same for diesel and unleaded petrol?

Because of the different components that make up the two, the pressures are slightly different. Overall, diesel is in shorter supply than petrol in Europe as gasoil, which goes into diesel, is used extensively for heating on the Continent. The increase in the number of diesel cars has also increased demand for diesel.

Is the Government cashing in?

Revenue from fuel duties and taxes over the past decade has increased in line with rising fuel costs and increased production. If the Government increases fuel duty, as is expected widely, later this year it would boost revenue by between £500 million and £600 million.

What can the Government do?

The Government has little influence on global crude prices. But cutting or freezing fuel duty is possible.

Is the price rise inexorable?

The head of Opec has said that prices could rise to $200 per barrel but Shell said yesterday that it was baffled by current prices because, despite the pressures in the market, there is still sufficient oil to meet global demand. High prices are also stimulating a frenzy of investment in new fields previously considered too small, expensive or geologically challenging to extract commercially. This could have a dampening impact on oil prices when more of these enter production. But production simply cannot continue to grow indefinitely. By 2035 the world will use more than twice as much energy as it does today and demand for oil could rise from 85 million barrels a day to more than 120 million barrels.

How do the oil giants justify profits?

These are global companies with huge investment requirements. Shell invested $8 billion in the three months ended March 31. Costs in the industry are also thought to be rising at about 20 per cent per year.

Are biofuels the answer?

The EU has called for 10 per cent of all fuel to come from biofuels by 2020 but they seem to be creating as many problems as they solve by hindering food production and causing deforestation.

What should Opec do?

It is unlikely to agree to boost its production soon. It argues that speculators have more influence over the market than it does.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3841955.ece

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