Oil pressure rising

He had become used to defending the firm's pricing policies against allegations of profiteering and was well versed in explaining how the company had to cope with higher energy costs and was investing 1.60 for every 1 of profit the company made.

But a crisis thousands of miles away was about to change his well-rehearsed presentation.

Unrest in the Middle East and North Africa was casting a cloud over the world economy, and Laidlaw was now having to warn customers that despite reporting a record 2.3 billion group profit, they could face even higher bills.

"We hope to delay that for as long as possible, but we've only got to see the volatile events in the Middle East," he told reporters, explaining that higher oil prices had dragged up the cost of gas.

Laidlaw had just returned from the Gulf with some good news. He accompanied Prime Minister David Cameron on his tour of the region, which included a visit to Qatar, where Centrica announced a 2bn gas supply agreement with state-owned Qatargas. But the deal was quickly overshadowed by scenes of rioting in Libya.

Cameron was forced to cut his trip short and return to the UK to help deal with the evacuation of British nationals from the north African country, where oil exports were said to have plunged to near-zero.

Other companies with international business began to review their operations and assess the potential damage. British Airways owner International Airlines Group said it would have to cut expansion plans and put up fares if prices do not recede, while soft drinks group Britvic warned that its profits would be down because of the rising cost of the oil derivative used to make plastic bottles.

The news jangled traders' nerves and sent Brent crude surging to within touching distance of $120 a barrel before Saudi assurances and comforting noises from the International Energy Agency (IEA) brought prices back to around $114.

Developments in Libya have particularly impacted oil prices as the country accounts for about 2 per cent of global production.

More daunting is the prospect that serious discontent could spread to bigger oil powerhouses such as Algeria, Iran or even world export leader Saudi Arabia, which would lead to serious ructions in the global economic fabric.

Neil Dwane, chief European investment officer at asset manager RCM, says any company operating in industries where oil is a major factor will have to formulate a strategy to cope with the possibility of prices remaining north of $100 a barrel. He and many others are concerned that the cumulative effect will be a stalling of the slow recovery from the global recession of 2008.

"This type of movement in the oil price really undoes a lot of that optimism that we were beginning to see come through," Dwane says.

Economists calculate that every additional $10 on the price of a barrel of oil knocks about half a percentage point off of global economic growth, as measured in terms of gross domestic product.

However, the extent of this impact depends upon how long prices remain at an inflated level.

While a few economists and business leaders have gone on record stating that they believe the current spike is a temporary blip, most acknowledge that prices will hinge upon fast-moving political developments that have so far proven difficult to predict.

"The issue is the speed at which some of these regimes have fallen," says Catherine Hunter, energy analyst with IHS Global Insight, the forecasting group. "Who would have believed even three or four weeks ago that we would have been seeing such long-entrenched rulers finally being ousted?"

Algerian president Abdelaziz Bouteflika has made a number of concessions to demonstrators in his country in an attempt to avoid the fate of his exiled counterpart from neighbouring Tunisia. Even so, analysts at Nomura have raised the prospect that oil prices could surge as high as $220 if the situation imploded in Algeria, leaving both it and Libya off-line.

"The closest comparison is the 1990-1991 Gulf War," Nomura's brokers in Hong Kong said. During that conflict, oil prices rose 130 per cent in seven months.

Alec Carstairs, head of UK oil and gas for accountancy giant Ernst & Young, says there is probably "no right answer" when it comes to predicting the end of the current turmoil in the Middle East.

"It is pretty hard to tell, to be honest," he says, "but there is no doubt that the longer the instability lasts, the longer the oil price will stay high."

The impact of this will be exacerbated by other factors, such as how efficiently a country uses its energy resources. Therefore, higher energy intensity economies such as those in Asia and other emerging regions would suffer the most.

This would be significant for UK firms, many of which are looking to the Far East to bolster sales and profits. Another major concern is the prospect of rising inflation, which could potentially strangle economic growth at home.

The Bank of England has been under pressure to increase the cost of borrowing in an attempt to stem inflation, which is currently running at double the 2 per cent target set by the government. Analysts estimate that could rise even further - to 4.7 per cent by the autumn - if oil remains close to $120.

Oil producers know too well that the economic perils of highly-priced crude include pushing the world back into recession, which is why the Opec nations say they are willing to make up the gap left by the loss of Libya's output.

"No-one is rubbing their hands in glee at all, even though there are more profits to be made for producers still in operation," Carstairs says. Though the government would also gain through higher corporate tax receipts, the risks to the broader economy would eventually force a major slump in energy demand, with the damage outweighing any short-term gains.

However long the region's tensions persist, the fact remains that any incumbent or new regime within an oil-producing country will be keen to quickly restore all lost production. This will be particularly true of Libya, where its light sweet crude is virtually the only export. The main risks to the swift resumption of production would be substantial damage to well and pipe infrastructure, or the possible nationalisation of assets by any new leaders that come to power.

"In Libya, any regime change could mean the cancellation of existing contracts, threatening working capital and investment, while contractors' assets could be seized by the authorities or damaged during the unrest," says Darren James, sales director with political risk specialist Central Insurance Services.

Dwane at RCM says once the situation is more settled, the world might find that Opec's new floor price for oil has gone up by about $10 per barrel, to between $80 and $90. This, he notes, would effectively cover the cost of the 22bn or so in extra government spending announced by King Abdullah last week in a bid to fend off any popular uprisings in Saudi Arabia.

Any unrest in that kingdom, which is currently producing an estimated nine billion barrels of oil per day, would have serious global economic consequences. Despite the grand financial gesture of a massive rise in welfare spending, plans for a "day of rage" protest in Saudi Arabia on 11 March look set to go ahead.

"But the real place to watch will be Bahrain," Dwane says of Saudi Arabia's tiny island neighbour, where protesters continue to gather in the capital.

"Both are in a similar situation in terms of the relationship between the Sunni and Shia populations. Tensions between these two groups have been growing in a number of countries, and if problems emerge in Bahrain, that could signal trouble for Saudi Arabia."

Price rise boost for North Sea

Dominic Jeff

The soaring price of oil, driven by the crisis in Libya, will provide a welcome bonus to companies operating in the North Sea - and some of it may be used to fund further investment and work its way down the supply chain.

Current projects on the UK continental shelf are generally based on a long term price forecast of about $85 a barrel, so everything above that is a pure cash injection for the producers - at least in the short term.

Analysts believe that while oil companies are unlikely to be considering changing the long term price forecasts they use for budgeting investments just yet, the extra cash flowing into their coffers could be used to fund exploration or expansion.

James Hosie, oil and gas analyst at RBC Capital Markets, said: "$115 a barrel is good news for anyone who is producing right now in the North Sea.

"More cash flow means they have the option of accelerating activity, looking to acquire new assets or paying down debt. We saw that in 2008 (when Brent crude hit an all time high of $147 a barrel] - many North Sea producers reported record cash flows and profits that year."

But if prices were to stay high, the picture is not as simple, as businesses further down the supply line may start to raise prices.

"Oil field services are demand driven, so in the longer term higher oil prices are likely to lead to rising costs," Hosie said.

"A very short shock like the last few days is a straight positive (for production companies], but over time, as companies budget for increased exploration development work, costs are likely to rise."

That could benefit the oil and gas support services sector based around Aberdeen.

One further effect of the turmoil in the Arab world may be to push up the value of assets in the North Sea and persuade oil majors, who have been moving out of the UK continental shelf, to stay a little longer.

Hosie said: "The oil price is being driven by political risk. The UK could be viewed as a safe haven, so it's a strategic resource. Majors who might be thinking of selling out will consider hanging on to their North Sea operations, or asking a higher price for them."

Alex Kemp, Schlumberger professor of petroleum economics at the University of Aberdeen, agreed that while companies will not be making investment decisions based on a $110 price, the cash flow bonanza created by higher prices in the short term will probably be used to finance further exploration.

The professor recently published a bullish report on the prospects for the UK continental shelf and believes that long-declining production could flatten out as investment is ramped up after being held back by the recession and the financial crisis.

Kemp said: "Banks don't lend for exploration, so the higher prices will help, because the cash flow helps finance it."