Record oil prices to hit business transport policies

The price of oil rose to $135 per barrel last week, as pundits predicted that soaring fuel prices will begin to affect business transportation policies.

Experts blamed both speculation and rising demand in Asia for the continuing bull run on the market, which saw prices reach record highs last Thursday, before dipping back to about $130 per barrel. Investment magnate George Soros saw speculative patterns in the rise of oil prices, adding that the price hikes would not cease until the economy entered a recession.

"People know that the summer is the busiest travel period of the year," said Mike Pina, spokesman for the American Automobile Association, who said that price hikes had hit consumers hard.

The AAA was predicting a one per cent drop in consumer travel over the US Memorial Day weekend as a result of the rising cost of fuel, and forecast that gas prices could reach four dollars per gallon during the next few weeks. On Memorial Day, the US national average for regular unleaded fuel hit a record $3.936 – up from $3.212 a year ago.

Meanwhile, on this side of the Atlantic British Airways chief executive Willie Walsh last week warned that high oil prices would mean an end to the era of cheap flights, warning that ticket prices would have to rise or many low cost operators would be forced out of business.

In related news, hundreds of lorry drivers are expected to protest in central London today at the rising price of fuel. They claim that the soaring cost of diesel combined with a planned increase in fuel duty for October will force many hauliers out of business and are demanding that the government introduce an "essential user" duty rebate for drivers of heavy goods vehicles. The chancellor, however, has already deferred the planned two pence increase in fuel duty by six months to October, and will be under pressure from environmentalists to stick with the "green tax" increase.

Continued oil price rises could have significant ramifications on business transportation policies, suggested Rick Kment, an analyst at DNT, who follows ethanol markets.

According to a 2006 poll from the US National Federation of Independent Businesses, 38 per cent of energy costs for small businesses are directly linked to vehicles, meaning that rising fuel prices will have significant impact on many firms' bottom line.

"The US today is in terms of gasoline prices is somewhere near where Europe was a long time ago, and if you look in the difference of fuel efficiency of the average fleet in Europe and the US you can see what the effect could be," said Kment, adding that rising gasoline prices were good for the ethanol industry.

Along with alternative fuel and more fuel efficient vehicles, corporate travel policies that reduce demand for travel such as car sharing and increased use of video conferencing technologies are also expected to become more prevalent as prices continue to rise.

There is also little end in sight to inflationary fuel prices, according to Kjell Aleklett president of the Association for the Study of Peak Oil and Gas, who argued that rising prices are a symptom of peaking oil production capacity. "In total on average we have a declining production of roughly 3.5-4 per cent per year," he said, adding that new discoveries of oil reserves, such as the Canadian tar sands, are more expensive to retrieve.

President Bush recently asked stalwart oil producer Saudi Arabia to produce more oil to meet demand, but Aleklett said that many oil fields are now at full capacity. "We should have seen an increase in production," he said, adding that because China subsidises the cost of oil for its citizens, demand there was especially high. Oil slated for delivery in 2016 was hitting $145 per barrel last week.

However, many in the oil industry claim that Peak Oil theories are alarmist, and that prices rise it will become increasingly economical to increase investment in extracting oil from new fields.