Oil prices are establishing new highs above $100 a barrel, adding to inflationary pressures worldwide, just as many economies begin to experience slower growth.

Record oil prices have led to more calls by consuming countries for Opec, the oil cartel, to boost supplies to the global market. But member states Venezuela and Iran are pressing for production cuts, fearing the impact on energy prices of a possible recession in the US.

Weakness in the US dollar has also led to unprecedented levels of speculation on prices moving higher as hedge funds and other investors use the oil market to hedge against the threat of rising inflation.

Jon Rigby, energy strategist at UBS, answers questions on these issues below. Mr Rigby follows the progress of oil on commodity markets and analyses the European energy sector on equity markets.

.....................................................................................................................

Do you think people’s disposable income will fall due to an increase in oil prices? Can this decrease Consumption and GDP? Could increases in oil prices lead to an increase in unemployment?
Huseyin Kasar, London

JR: I think it’s inevitable. I think the truth is that economic growth has been impacted by the rise in energy prices over the past 4-5 years. It is testament to the strength of the global economy that this impact has been so limited. Now that we are seeing a cyclical downturn which may, or may not, be related to high oil then I think the impact will start to be felt more acutely. As an aside it’s probably unemployment that will cut under structural demand for transport fuel in the OECD

.....................................................................................................................

Which is the most important factor in driving the short term oil price in your opinion: the potential US recession, rising demand in the developing world vs waning reserves, commodity speculation?
Cormac O’Shea, Warwick

JR: In the short term the main driver will be economic slow-down or recession. The severity of that will determine if prices come down or stop going up quite so quickly. I am sceptical concerning commodity speculation effects. It seems to me that with heightened risk aversion in markets and genuine fears of recession, if speculators were responsible then oil prices would be significantly lower than they are today.

.....................................................................................................................

Iran receives much of its payment for its oil exports in non-dollar currencies. Do you think the country is using the weak dollar as a convenient excuse for maintaining output and prices? James Longmore, London

JR: Other than lobbying within OPEC Iran has little effect on short-term prices. Iran has very little flexibility when it comes to reducing prices. Its lack of access to industry expertise and investment (via sanctions – but also its own unattractive terms) is one of the reasons prices are where they are. However, there are a number of countries not realising their potential in terms of production and Iran is one of them.

.....................................................................................................................

Would it not now be helpful to all parties for oil to be traded in Euros?
Charles Hazell, Ireland

JR: The currency doesn’t really matter. The real price of oil reflects many things: costs in the industry, budgetary calls on producer nations, consumer demand patterns – and these will be apparent in many different currencies. One of the reasons that demand has been surprisingly robust is the declining value of the US dollar, which means its price (although $100 sounds scary) has not risen as much as is often perceived (though that’s no solace to USD consumers).

.....................................................................................................................

Is the price of oil related to the oil peak production and what price you forecast for 2020?
Pier Enrico Zani, Genova

JR: I don’t think we have passed the peak of global oil production. But I do think we have passed the peak of oil production at certain price levels and we have certainly passed the peak in production in a number of very important basins. The dynamics and the implications for prices in the mix of today’s and tomorrow’s supply is very much a product of this. I wouldn’t dare forecast 2020 prices!

.....................................................................................................................

Is the skills shortage and the ageing workforce in the UK and USA oil industry having any noticeable effect of the ability of oil companies to develop new supplies? In the mid-1970s graduates wanted to join the oil industry. I hear that they are now joining mining companies, engineering and environmental companies. Looks as if we’re really building up problems for the future.
John Packer, UK

JR: My impression is that skilled engineers are one of the key bottlenecks in the industry. In fact its not just skilled engineers but skilled and experienced engineers. This is especially the case as projects get more complex and society’s tolerance with respect to safety and the environment tightens.

.....................................................................................................................

Can OPEC control the rising cost of oil or it is a matter of supply and demand?
Richard Kihara, Baltimore

JR: OPEC has almost no control over the rising cost. Spare capacity (the pressure valve used to manage prices) is historically low, and effective useable spare capacity – because of issues at the producer or lack of appropriate refining capacity – is even lower. This may resolve itself to some degree over the next few years as some more Saudi capacity is added. I would add (and this may surprise many people) that in terms of the cost of the marginal new barrel we are not that far away from a realistic trading range in any case.

.....................................................................................................................

Given that Chinese GDP growth is incrementally 8x as energy intensive as Japanese and 4x US, isn’t there a severe demand side risk to oil prices if Chinese policy makers finally move closer to world pricing by reducing fuel subsidies, as has been mooted by influential local think-tanks, just as US inventories are rapidly building?
Sean Maher, London

JR: Chinese demand is a key support for oil prices as it is for many commodities. In the first instance price changes would effect demand but probably not consumption (given pent up unsatisfied demand in the system). China is moving through a profound change in the nature of its economy and that will see absolute energy demand rise irrespective of its internal pricing policy. Over time I expect Chinese energy demand to rise but energy intensity to fall just as it has in all modernising economies. I’d be surprised to see Chinese policy makers dramatically move internal pricing to world levels.

.....................................................................................................................

Will oil prices go back to $80 or $90 per barrel, depending on how deep is the slow down (or recession) in the world economy?
Jorge Guardia, Costa Rica

JR: We recently calculated that in a bad recession the implied inventory build might imply a fall back to $70 or so. But we think that would be a temporary respite since this price looks bottom end of the fundamental range given where costs are (and assumes no OPEC action).

.....................................................................................................................

Does the 10-fold increase in oil prices over the last 10 years and the fact that oil production has not exceeded the May 2005 number (EIA data) mean that ”peak oil” is now past tense? If not, when will production increase again? More pertinently for oil importing countries like the UK and Australia, when will oil available for export from exporting countries increase again?
Rod Campbell-Ross, Sydney

JR: I think we have hit a bit of a roadblock in the past couple of years reflecting slow investment in the early part of this decade, slowing Russian growth, ongoing declines but also unusual interruptions (such as Nigeria). I think production will continue to rise but at a pace not too different to demand, meaning markets stay tight.

.....................................................................................................................

Now that $90 is being accepted as the price of oil by the majors for future financial planning, is it fair to say that the price of oil is largely down to supply and demand fundamentals rather than the “speculation” by traders which often cited as being a major influence? Surely the majors could not take this step if this was not the case.
Richard Crozier, Edinburgh

JR: I agree that the price is where we it is mainly because of fundamentals and not speculation. That said I think the current price reflects some degree of scarcity premium. I think costs (operating and capital) suggest a price of around USD70 and the majors are planning on this basis (although they may have a budget at a higher level). This rather more cautious view reflects the need of the majors to commit for the long-term.

.....................................................................................................................

What is the likely scenario for Russian oil and gas shares?
J Liversedge, Ontario

JR: In general I am positive on resource holders and the Russians are large resource holders. However Russia needs to update its fiscal terms to encourage appropriate greenfield investment by offering attractive returns so this value can be properly realised. We are positive on the outlook for gas and see Gazprom (whether the EU accepts it or not right now) as crucial to European security of supply.

.....................................................................................................................

How interlocked is the price of oil to the decline of the dollar? Or the rise in the price of gold?
Robert Blalack, Paris

JR: I am told by the expert statisticians that there is no relationship between the dollar and prices. My observations suggest otherwise, I must say. I think that the falling dollar has sheltered many economies globally from the rise in nominal prices.

.....................................................................................................................

Which alternative energies do you think are reasonably expected to take more shares in the energy industry in the future?
Hyejin Cho, Seoul

JR: There are few obvious substitutes for oil as a transportation fuel right now. I believe that the biggest bang for the buck for the policy makers is to make our oil usage more efficient rather than find other fuels. Otherwise second generation biofuel technologies will certainly see significant research dollars.

.....................................................................................................................