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Last Updated: Friday, 24 June, 2005, 13:37 GMT 14:37 UK
Q&A: What does $60 a barrel mean to you?
The price of a barrel of US benchmark oil has broken through the $60-mark and is trading at near record levels.

There is the spectre of disruption to supplies, consumer demand for oil products such as petrol has remained high while the thirst of fast-growing economies like China and India is proving difficult to slake.


What is a $60 barrel of oil really worth?

Sixty dollars sounds a lot to pay for a barrel of oil - and indeed a barrel of oil now costs more than twice as much in dollar terms as it did in 2001.

In relative terms, however, oil was much more expensive in the early 1980s and in the 1970s.

The $8.50 rise in the price of a barrel of oil between August 1973 and January 1974, while tiny in dollar terms by today's standards, nevertheless amounted to a 274% jump in the cost of crude.

What does a $60 barrel mean to the consumer?

The most obvious effect is the price of petrol - and that most directly affects people with cars.

The impact on American car owners is likely to be greater than on European drivers, because tax makes up a smaller proportion of the overall price at the pump in the US than it does in Europe.

But even those who don't have a car will feel the impact.

Rising oil prices lead to higher business costs, reducing profitability. Many businesses, such as airlines, will seek to pass this on to the consumer, cutting into household income.

Oil worker turning large tap
The concern for many oil users is that the taps may be shut off

British Airways, for example, has raised its fuel surcharges for a second time and now wants an extra 48 ($87) on each long-haul return ticket.

Not all companies will be able to do this. But lower profitability could encourage them to lower their costs in other ways - perhaps even by getting rid of staff.

Can businesses protect themselves?

Some companies have managed to defend themselves from rising prices by complicated hedging strategies.

These involve agreeing a set price for future oil supplies over a fixed period of time - in other words, allowing them to lock in lower prices.

Smaller companies are often not able to take advantage of such sophisticated commodity market strategies, and have no option but to suffer the consequences.

It becomes a chicken-and-egg situation. Lower profits can lead to job cuts, hitting consumer demand just as higher prices - both at the fuel pump and on supermarket shelves - do the same. And ultimately, lower consumer demand hurts company profitability.

On the other hand, oil companies such as BP and Shell have enjoyed booming profits, largely helped by the rise in the price of oil.

What about the impact on the global economy?

The received wisdom is that higher oil prices are negative for economic growth, particularly for countries which are heavy oil importers.

As prices rise, consumers turn cautious and profits fall, the countries' exports decline and trade deficits rise. A sustained rise in prices could lead to aggressive wage demands, again pushing inflation higher.

The International Monetary Fund (IMF) has suggested that a permanent $15 a barrel oil price hike would reduce the level of GDP by 0.6% in the first year.

Will it really be that bad?

Some analysts argue that the impact could be less severe than expected.

The strength of the euro and the yen against the dollar have to some extent softened the impact of higher oil prices on the European and Japanese economies, analysts said.

At the same time, many countries have become more energy efficient and some have even reduced their reliance on oil.

Price rises can also reflect booming investment in certain countries, which is less damaging than a rise solely attributed to falling supply.

Analysts also point to the fact that despite high prices demand has shown little sign of dipping, indicating that there still is enough drive in economies to deal with the higher costs.

How long that lasts, though, is another question entirely.




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