Oil price rises put pressure on profits

The near-tripling of oil prices over the past year will lead to a squeeze on wages and profits as manufacturers try to avoid raising prices, experts warned this week. Some commentators have even suggested that a global recession could result.

The ailing North Sea offshore industry will also gain little, as oil firms see the rise as a short-term change and are wary about embarking on new drilling projects.

Manufactured goods prices, except food, petrol and tobacco, rose by just 0.4% in the year to February. But the price of materials used to manufacture the same goods rose 1.9%, due mainly to the rising price of oil. The price of Brent crude oil was $29 per barrel earlier this week, compared with $12 at the same time last year.

Dougie Peedle, deputy chief economist at the Engineering Employers’ Federation, said profits were under pressure. `Manufacturers are unable to pass on the increase because of intense domestic competition and the strength of sterling against the euro,’ he said.

The effect will be lower wage rises, said Andy Schofield, economist at Business Strategies. `There will be costs coming through for employers, but they really call the shots these days in pay settlements,’ he said.

Energy-intensive sectors in international markets, such as chemicals, metal production, plastics and rubber, are likely to feel the biggest squeeze.

For other manufacturers, the effects of the price rise could be offset by improving export markets – unless, as Will Hutton, Industrial Society chief executive predicted this week, the increase leads to global recession. Writing in last Sunday’s Observer, he said of previous oil price rises: `After each of these hikes, the world has been plunged into each of its three post-war recessions.’

But the EEF’s Peedle said the rise should be seen in its long-term context. `It sounds steep in percentage terms, but the $10 per barrel level was a low point. We should be comparing it with a rate of about $20 a barrel. And there may be relief if OPEC members agree to boost supply after they meet at the end of March.’

The level of exploration drilling has not yet recovered from last year’s downturn – the DTI said it had issued fewer well consents in the first two months of this year than in the same period of 1999.

Jonathan Waghorn, a North Sea analyst at oil consultant Wood Mackenzie, said: `Firms are starting to look at activity they shelved 12-18 months ago, but we haven’t seen a pick-up yet.’

New developments – which the hard-pressed offshore industry needs badly – are unlikely to result from the price rise, according to a spokeswoman for the UK Offshore Operators’ Association. `Operators believe the high prices are not sustainable,’ she said.

An executive at one of the largest North Sea operators went further: `People are predicating all developments on the premise of a barrel being worth $14-$18 in the long term – it was only $10 a barrel a year ago, and people haven’t forgotten that.’

Waghorn added that oil firms would want to cover such a worst-case scenario. `They’re asking: “Can we get projects that will not lose us money at $11 a barrel?”.’

Prices are expected to fall after the Opec meeting on March 27, which is expected to approve increases in export quotas for all the cartel’s members. Saudi Arabia, the world’s biggest producer, indicated last week that it was prepared to increase output at short notice to avert any worldwide stock shortages.