There are, naturally, various factors that impact on the price of oil, both positively and negatively. The first of these factors is, of course, the economy. When the economy grows, consumption will increase. In that case, a barrel of crude oil will logically become more expensive. In addition, supply and demand play a role, and this relationship is not always easy to estimate.

 

The major oil companies have been unable to increase oil production to any great degree, despite heavy investments. This is true first and foremost of companies operating in countries that are not members of OPEC, the cartel of oil-exporting countries. OPEC has therefore increased its market share again and consequently acquired greater control over the oil market. New sources of oil have been found in places that are (more) difficult to exploit, with the result that production is more expensive and inevitably the price goes up. On the demand side, the picture is clearer, because this is showing an upward trend mainly as a result of the sharp rise in demand from growth markets such as China and India. According to the US Department of Energy, this year the world will consume an average of 88 million barrels of crude oil a day. Consumption has never been so high.

Tighter supply and higher demand automatically lead to price rises. The question is, however, how high can the price of oil go ? In practice, this is difficult to predict, as in addition to supply and demand, other factors play a role, the most significant of which is probably the geopolitical situation. Crude oil is taken to its destination in huge tankers and a disruption in tanker traffic can have serious consequences for the oil price. This became clear when political and social unrest broke out in the Middle East in the first few weeks of 2011.

 

The price of Brent - the North Sea variety of crude oil – immediately rose to over 100 dollars a barrel. The difference compared with West Texas Intermediate – the leading American variety – at once increased to more than 10 dollars. This meant that the oil market is taking into account the fact that supplies in Europe in particular may be at risk. Most of the oil used in Europe comes from the Middle East. If the Suez Canal were to be closed, the price of oil could instantly go through the roof. Oil dealers’ worst nightmare, however, would be if Saudi Arabia were to be confronted with the same problems as Egypt. Saudi Arabia is the world’s biggest oil producer.

 

The above cocktail of factors means that it is difficult to assess how oil prices will develop. The mechanisms that operate between the exploitation of oil to its transportation and then processing may not falter at any time, otherwise the price of oil goes up. This means that oil is always of particular interest to speculators, whose behaviour is completely unpredictable. For instance, it became clear after the event that speculators played a major role in the record price of 140 dollars per barrel of crude oil reached in the summer of 2008. It is impossible to say to what extent speculators again have the oil market in their grasp at the moment.

 

Nevertheless fleet managers do better to keep an eye on the trend because fuel costs account for between 20 and 25% of the Total Cost of Ownership of a fleet. More expensive fuel means higher costs, of course, but on the other hand cars are becoming increasingly economical. Nevertheless, it seems advisable where possible to integrate long-lasting and fuel efficiency cars into the fleet, because if the price of oil were to fall, then you record twice the profit.

 

Jos Sterk