Suppliers wait for new capacity to loosen Opec grip on global output

Fears are growing that the high price of oil could drive already hard-pressed UK manufacturers out of business. As the price of the benchmark Brent crude rose to $30.41 at the end of last week – despite an agreement by the Opec countries to increase their output – the Engineering Employers’ Federation warned that UK […]

Fears are growing that the high price of oil could drive already hard-pressed UK manufacturers out of business.

As the price of the benchmark Brent crude rose to $30.41 at the end of last week – despite an agreement by the Opec countries to increase their output – the Engineering Employers’ Federation warned that UK exporters could see their already tight margins disappear.

Dougie Peedle, deputy chief economist at the EEF, said: `The longer the price stays around the $30 mark, the more pressure will be put on firms’ margins.’

He explained that while continental European rivals would also have to absorb the higher oil price, they would have more margin to absorb the rise in input costs than UK firms, many of whose margins were already down to 1% or less due to the pressure of sterling’s strength against the euro.

Oil prices are a major factor in falling confidence in the engineering sector, which has already seen members cut back investment plans.

The squeeze on manufacturing will increase pressure on Chancellor Gordon Brown to offer some relief on petrol duty, which at over 80% is higher in the UK than elsewhere in Europe.

Jim Wood-Smith, an analyst at stockbroker Greig Middleton, said while the long-term trend was for oil to trade in the $15-$20 range, there was likely to be a `sustained period of high prices’.

BP Amoco’s chief economist Peter Davies said last week that only the Opec countries would be able to meet the shortfall in supply over the next 18 months, as non-Opec producers recovered from the impact of investment cutbacks in response to crashing prices in 1998.

The cartel, which accounts for 40% of global production, has a delicate line to tread. While it commands more price-setting power than at any time since the 1970s, it will only do so until non-Opec production recovers from investment cutbacks in 1998 – probably in about 18 months.

Opec wants to maximise its returns without sending the price so high it accelerates the search by consumers for alternative fuel sources. But at the same time, releasing too much oil could precipitate a repeat of the crippling price collapse of 1998.

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