Oil reserves shrink further

As the International Energy Agency (IEA) releases its latest report warning about an oil supply "crunch" within 5 years, F&C believes oil companies will continue to struggle to find new sources of supply.

Reduced supply is likely force up oil prices to record levels, but could have a positive impact on the growth of the alternative energy sector.

In its latest Medium-Term oil market report, the IEA – that acts as energy policy adviser to 26 member countries – says oil demand will rise by an average of 2.2% a year between 2007 and 2012, up from a the other hand, continues accelerating driven by strong economic growth in emerging markets, especially in China and the Far East.

"China is only a few years into its industrialisation programme and the number of cars in the country is still a very small fraction of those in the US. This could dramatically change in the next few years, hugely increasing demand for oil," said Ted Scott, manager of the F&C UK Growth & Income Fund. "There is also a growing political risk in the oil sector. Countries such as Russia and Venezuela are making it increasingly difficult for Western companies to access and export their oil."

Investment to develop new extraction techniques is also affecting profitability. "It is becoming increasingly difficult, and much more expensive, to find new sources of supply for oil. The most accessible areas to have already been exploited and oil companies are being forced to less attractive areas. What this reports shows is that oil reserves have been generally overestimated," he said.