Eighteen months ago, a colleague of mine bought a “Chelsea Tractor” due to his personal life being akin to the chap on the BT adverts. You know the guy, the one with the ready-made family. 

Buying such a family-oriented vehicle, he was only trying to do the right thing. But when he first filled up with fuel he got a shock when it cost £84 to fill the tank up. And at 24 miles to the gallon, the financial equation was not that great.

Since then, my BT man has been “disconnected” from his partner and family and it now costs over £120 to fill up the car he no longer needs.  He is trying to sell his car now as the high oil price is likely to be with us for some time to come.

My colleague is not alone. Fishermen, truck drivers and consumers across Europe and Asia have been protesting against the increase in petrol and diesel costs as oil prices have jumped about 40 per cent since the beginning of the year and more than five-fold since 2000.

What is it that is keeping oil prices so high? Several factors point to how oil prices recently reached levels of almost $140 per barrel.

Firstly, a weak US dollar is a massive contributory factor. The sharp jump in the oil price since 2005 has coincided with the plunge in the value of the dollar against other leading currencies.

Dollar weakness encourages financial investors to look for other more lucrative investment opportunities – oil has been top, or close to top, of the list. Oil trades in US dollars, making it cheaper to buy in recent times.  Signs that the US economy may be on the brink of recession have undermined the dollar, boosting prices. 

In May, prices rose $11 in a single day – a day when increased unemployment figures were announced.

Many analysts say growth in global supplies is worryingly failing to keep pace with growth in demand. The Middle East remains the biggest player in oil dwarfing the rest of the world. Saudi Arabia alone possesses 21.9 per cent of the world’s proved reserve but has been reluctant to boost output substantially. 

The North Sea and Canada still have substantial reserves but supplies from countries such as Russia are thought to have peaked and finding new sources of oil is difficult and expensive. Nobody knows how long the world’s oil reserves will last, but even the oil industry suspects the world peak is now approaching. It says it has 40 years of proven reserves at the moment – but it said that 30 years ago.

If supply is on the wane, what about demand? Global thirst for oil is intense. Demand has risen by circa three million barrels a day since 2005 and is expected to rise by 32 million barrels a day in the next two decades.

The US remains the world’s largest oil consumer and high individual fuel usage continues to put pressure on crude stockpiles. Fast-growing China and India are significantly increasing demand and are forecast to account for 40 per cent of the growth in oil demand by 2030, as industry grows and demand for travel increases.

Much of the world’s oil is concentrated in volatile regions, leading to fears of frequent and unpredictable disruptions to supplies. For example, Iraq is still beset by violence while militant groups in Nigeria’s main oil-producing region have recently impeded about 25 per cent of its output. Furthermore there are fears that an Israeli attack on Iran’s nuclear installations could trigger a wider conflict and threaten traffic through the strategically vital Strait of Hormuz which is used to ship 40 per cent of the world’s oil.

OPEC (the Organisation of the Petroleum Exporting Countries) says the price surge cannot be explained by the fundamental ratio of supply and demand and claim that some traders make huge amounts of money betting on the direction of prices, in turn forcing prices higher. Others maintain that traders are simply hedging their investments against future market developments to reduce risk.

Goldman Sachs energy strategist Argun Murti is warning prices of crude oil could soar to $200 per barrel in as little as six months from now. Maybe we should listen to him as he predicted prices would break through $100 three years ago when oil was circa $55 per barrel.

The bulk of the evidence points to still further increases in the oil price. And all this in spite of Saudi Arabia’s announcement that it will increase oil production by 200,000 barrels in a day from July in a move to meet growing world demand. Time for my BT man to go more Smart Car than Chelsea Tractor then?

Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull. Email: TILaw@montpeliergroup.com