Escalating oil prices sow confusion on contracts

25 August 2004
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26 August 2004 | Sally Mesner

Purchasers are being given conflicting advice about how to handle escalating oil prices.

Energy management consultant John Hall Associates (JHA) has predicted prices will continue to increase over the next three years and is advising purchasers to act now to reduce future risk.

The company says fuel buyers should extend their existing fixed-price contracts for the next 12-18 months.

"High oil prices are here to stay," said Stephen Barraclough, director of research at JHA. "We are advising fuel buyers to tie up contracts now.

"It is unlikely there will be a better deal soon."

The consultancy's prediction came as oil prices hit $46 a barrel last week. "A lot of purchasers believed prices would go down six months ago and didn't put any measures in place. They may be regretting that now," added Barraclough.

His view contrasts with the prediction by Opec, the organisation of the world's main oil producers, that prices would fall to around $30 a barrel by the end of the year.

Martin Rawlings, deputy chairman of the CIPS energy committee, also disagreed with Barraclough's prediction of high prices. He said prices would drop in the next six months and purchasers should sign up only to three-month contracts.

"I wouldn't fix my prices for a long-term contract in energy at this time," he said. Rawlings added that hard negotiation was the only option for purchasers.

"Negotiations on deals now are the most strategic that any buyer will ever do. My advice is: don't commit yourself too soon."

Purchasers indirectly affected by oil prices will have to shoulder increased costs, such as fuel surcharges on airline tickets, according to the Institute of Travel Management (ITM).

"The key thing to bear in mind is that the situation is temporary," said Tom Stone, ITM chairman. He added that travel managers should ensure surcharges are not permanently embedded in prices.

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