August 2004

Oil Prices Hit New Record

Crude oil prices have risen by about 30% this year to levels not seen since the early 1980s. What are the root causes of this dramatic price hike?

The price of US-traded light, sweet crude rose in August to nearly $47 a barrel while UK-traded Brent crude from the North Sea reached $44 a barrel. But the worst may yet be to come with some analysts predicting $50 a barrel if supplies are disrupted by tensions in the Middle East, Nigeria and Venezuela.

China and India are also adding to the problem; China is using 40% more oil today than at the same time last year and is now the second biggest consumer after the US. The US is also consuming more oil as a result of higher levels of economic growth and their continuing love affair with the motor car, especially SUVs (Sports Utility Vehicles).

Global stock piles of oil, traditionally used as a buffer against supply problems, have not helped as oil companies seek to hold lower inventory for cost and efficiency purposes. Earlier in the year, Shell exacerbated this problem by overstating the amount of oil it was believed to have in reserve.

OPEC, whose members account for roughly half of the world’s crude oil production, has been unable to respond with sufficient increased production and may even start cutting production to maintain the current high price levels. Traditionally, oil companies have stocked oil in times of lower seasonal demand, these new tactics coupled with increasing consumption by China, India and the US are making these buying windows smaller.

Violence in the Middle East, home to the worlds biggest exporters, is having a huge effect on the price. Attacks on foreign workers in Saudi Arabia and action by factions within Iraq have cast doubt on the security of supply in the region.

Oil prices had further risen on concern that Venezuela's oil exports might be disrupted if President Chavez had lost a referendum to remove him from power. Venezuela's oil output, and exports, had slumped early last year after opponents of Chavez went on strike to try to oust the former army colonel. Although Chavez has won the election, Venezuela is not seen as a stable source and will continue to be seen this way for some time in the future.

The problems of the largest Russian oil company, Yukos, responsible for a fifth of Russia's oil capacity could drive prices higher. Yukos is currently involved in a dispute with the Russian government over demands for back-taxes totalling £1.85 billion.

With all energy prices heading ever higher, what can be done to minimise the cost to you and your organisation? Pro Enviro recommends that all companies actively manage their energy use through energy surveys, process reviews and training programmes. Unnecessary consumption can be eliminated to ensure that you are getting full value from the resources you use, no matter what the price.

For more information on energy management contact Aneeta Patel on 024 76 279 000.