How will record oil prices affect us?

Oil prices have touched $100 a barrel for the first time.

The cost of crude hit the key psychological level after nearly a year of ever-increasing oil prices, which saw oil prices surge by 57% over 2007.

Here are answers to some of the key questions surrounding rising oil prices and the impact on consumers.

Q: Why has oil hit $100 a barrel?

A: Oil prices have been spurred on by a potent mix of supply concerns in the US, political tensions in oil-rich regions and soaring demand from emerging economies such as India and China.

The latest spike in prices comes amid increasing geopolitical concerns in the wake of the assassination of Pakistan opposition leader Benazir Bhutto, violence in oil exporter Nigeria and a political crisis in Kenya.

The threat of cold weather has also increased concerns that supplies will not be enough to cope with demand for heating fuel at the start of the Northern Hemisphere winter.

Oil cartel Opec – Organisation of Petroleum Exporting Countries – recently hiked production by 500,000 barrels a day. But there have been calls for Opec to pump even more crude into the market as supplies become particularly vulnerable to unplanned stoppages or surges in demand.

According to the US Department of Energy, oil producers turn out about 85 million barrels a day globally, while consumption is between 85 million and 86 million barrels a day. Meanwhile, US crude inventories now stand at their lowest level since January 2005, at 293.6 million barrels.

These supply concerns are set against a backdrop of ongoing problems in the Middle East, with fear of possible fighting between Turkey and Kurdish rebels also contributing to recent price rises.

Northern Iraq is not itself a big oil producer, but the worry is that any conflict in the region could escalate and spill over into other countries, disrupting vital oil supplies from the Middle East.

Q: What effect has the weakness of the dollar had on the price of oil?

A: The US dollar has hit fresh 26-year lows against sterling, while falling to record lows against the euro. The pound climbed past the $2 level last year for the first time since early 1981.

The weakness of the greenback has seen traders buy into oil as a hedge against the dollar’s falls, which has contributed to the upward pressure on prices.

Q: What are the expectations for global oil demand?

A: The International Energy Agency (IEA) now expects global oil demand to grow by 2.2% a year, having recently upped its previous forecast of 2%.

Part of the problem is that industrialised countries are now hugely reliant on oil and not just for energy and transportation, but also for manufacturing fibres, plastics, fertilisers and detergent.

The anticipated rise is also driven by increasing demand from China and the Middle East, according to the IEA. The body believes that India and China will account for 45% of the increase in global primary energy demand through to 2030, when the world’s energy needs are expected to be well over 50% higher than they are today.

Q: What are the long-term prospects for supply?

A: Oil, as a finite resource, will eventually run out and the rising demand pressures are speeding up this process.

The IEA predicts that supplies will slide sharply from 2009, with declines in particular set to hit mature oil producing areas, such as Mexico, the US and the North Sea.

New supplies of crude from the US Gulf of Mexico, Brazil and sub-Sahara Africa may provide some relief for stocks. Biofuel, such as ethanol, is also increasingly being turned to as an alternative to oil, although there are fears that it will not provide much relief. Experts are concerned that increased investment in biofuels will see governments cut investment in hydrocarbons development.

Q: What role is Opec playing?

A: The oil cartel supplies about 40% of the world’s crude and has been under mounting pressure to help ease prices by upping production.

But Opec is said to be reluctant to increase production again after its recent hike, which has added to the price push.

It is thought that Opec members feel they have little spare capacity to keep increasing production and the organisation opted against such a move in its December meeting, although it has pledged to meet again on February 1.

Q: What impact will $100 a barrel have on petrol at the pump?

A: Wholesale crude price rises take some time to filter through to the forecourts, but the recent hikes in oil prices have already seen the average UK price of unleaded petrol pass £1 a litre for the first time.

Yesterday, the cost of unleaded petrol hit a new high of 103.3p, beating the previous record of 102.92p set on St Stephen's Day in the UK.

It is feared the price of petrol could rise further still following the rise to $100.

Q: What other effects will rising oil prices have on consumers?

A: The impact on prices at the petrol pump is unfortunately not the only direct hit to consumer pockets. Consumers should also be prepared for a surge in utility bills and a rise in food and goods prices as manufacturers and businesses pass on the extra costs.

Rising fuel costs have already seen food producers hike prices, although manufacturers have – where possible – sought to absorb the additional expense, according to recent comments from UK manufacturers’ organisation EEF.

But transport businesses and airlines in particular have felt the pinch, with British Airways announcing at its interim results at the end of last year that it expects to spend a record £2bn on fuel this year thanks to surging prices.

BA recently hiked its fuel charges for the third time in 2007 to recoup some of the extra costs, leaving passengers faced with yet higher ticket costs.

Q: Where next for oil prices?

A: Experts said that traders have been taking advantage of uncertainties surrounding supply to help drive up the price of oil.

Analysts are warning of further volatility to come with inventory data and any further developments in geopolitical tensions having the potential to put upward pressure on prices.

But with inflation taken into account, crude prices are only just reaching the highs seen in the 1980s during the war between Iraq and Iran. On an inflation-adjusted basis, light, sweet crude reached a peak of $101.70 in 1980.

There are also hopes that an impending slowdown in the world’s economy should ease demand for oil in 2008, putting downward pressure on the cost of crude. Any move by Opec to raise production would also see oil prices fall back.