Oil prices to stay high

Despite oil prices rising above $135 a barrel for the first time this morning, Jeremy Tigue, manager of the Foreign & Colonial Investment Trust, believes the impact that these high prices have had on the economy has so far been limited.

However, this might change over the next few months as price hikes get passed onto the consumers.

"The oil price has doubled in the last year and increased tenfold over the last decade," Tigue commented. "Almost everyone has been wrong footed by this rise but so far there has been surprisingly little impact on economic activity or general inflation. However, with no signs of prices going down, the situation is likely to change." He added: "High prices are likely to soon start reducing demand as drivers move to smaller cars and people turn down the central heating and put a pullover on instead. The other response one would expect from higher prices is an increase in supply but this is just not happening".

According to Tigue there are two key reasons for this, the first being the world is running out of oil. Over the last 30 years there have been very few major new oil field discoveries and today most of the world's oil is coming from mature fields where production has peaked and it is now falling at an accelerated rate. The second reason why supply is not increasing is that all those countries with large oil reserves are earning revenues that are far higher than they have ever expected and have no incentive to increase production.

"At the same time, oil producing countries are seeing less need to allow the large oil companies in to manage existing production or find new reserves. In addition oil demand in emerging markets, particularly China, is growing fast so it is very hard to imagine oil prices falling in the short term," he concluded.