Despite recent concerns, government statistics across the world suggest that inflation is still pretty low. The official UK rate of 2.2% can hardly be described as hyperinflation.
But if that’s the case, then why does it seem as if the cost of living is soaring? There’s a simple answer to that – it IS soaring.
The inflation statistics only remain low because prices for things we don’t need, like plasma screen TVs and laptops, are falling or static. But the cost of things we need to buy – like water, heating and houses – is rocketing.
That trend isn’t about to stop any time soon. Oil hit a new high of $75.42 a barrel in New York on Friday. That’ll mean a jump in petrol prices and a further squeeze on company profit margins.
But the surge in oil prices isn’t just painful for the man in the street. Spare a thought for the poor oil companies…
The high price of oil is causing a dilemma for Royal Dutch Shell. The company is facing “a cost explosion” at its Athabasca oil sands project in Canada’s Alberta province, says The Times.
(By the way, you can read more about Canada’s oil sands, and how the country has oil reserves on a par with Saudi Arabia, here: How to invest in Canada’s black gold mine.)
Shell currently gets about 155,000 barrels of oil a day from the sands, but wants to raise this to 500,000. The first phase of expansion will hike output by 100,000 barrels a day.
Shell’s partner in the project, Western Oil Sands, now reckons that costs for this phase will come in at $11bn Canadian dollars (that’s about £5.4bn). The trouble is a year ago, it estimated that costs would be closer to £3.6bn.
Why the leap in costs? As Shell puts it: “The high price of oil is a double-edged sword. It leads to a heated marketplace and adds to input costs.”
As oil prices rise, there’s more demand for workers and equipment to help find more. A shortage of skilled labour means higher wage bills, and demand for raw materials has also pushed up the cost of cement and steel.
Shell Canada is carrying out a review of the project, with a final decision on investment later this year. So should it dump its plans for the sands?
We don’t think so. And we don’t think it’ll be a tough call for Shell, which is already the leading investor in oil sands. The company has the lowest conventional reserves of any oil major, which means it needs the sands to hit production targets.
And more importantly, the oil price is sitting near record highs and is unlikely to retreat any time soon. Commodities guru Jim Rogers reckons that oil “will be much more than $100 before the bull market is over,” he told Reuters.
“We’re going to have high oil prices for a very long time. The surprise is going to be how high it goes.”
MoneyWeek’s own James Ferguson reckons oil is likely to hit at least $80 a barrel by the end of October this year. You can read how James thinks you should take advantage of this by clicking here: How to profit from soaring oil prices.
But oil’s not the only resource heading up in the world. UK competition authorities are worried that the price of salmon could rocket too.
The Office of Fair Trading has referred a proposed £1.3bn bid by Norway’s Pan Fish for peer Marine Harvest to the Competition Commission. Pan Fish initially agreed the deal in March, and has since also acquired smaller rival Fjord Seafood for £408m.
So what’s got the OFT worried? Between them the firms already own most fish-farming sites on the west coast of Scotland. After the merger, Pan Fish will control 25% of global salmon production.
Although regulators in Norway and the US have approved the deal, the OFT believes the loss of competition between Pan Fish and Marine Harvest will push up the price of salmon, harming consumers.
Interestingly, the salmon industry is a sector MoneyWeek’s experts recommended getting exposure to nearly a year ago. You can read the original piece here: Where to invest – from property to salmon.
And not only is your smoked salmon about to get more expensive, so are the bags you carry it home in.
The European Union has introduced a 15% tax on plastic bags. A welcome move to protect the environment and get rid of litter?
Not at all. It’s a tax on Chinese and Thai plastic bags. Apparently eastern manufacturers are ‘dumping’ bags on European markets, damaging domestic companies. China and Thailand subsidise their plastic bag makers by giving them free land and tax holidays, claims the EU.
The British Retail Consortium reckons the bag tax will cost UK supermarkets an extra £61m a year, which will be passed onto consumers.
And the BRC adds that a 30% anti-dumping tariff on leather shoes, also proposed earlier this week, will add £25 a year to shoe costs per child.
So yet more price rises for the beleaguered UK consumer to deal with – but at least Europe’s vital plastic bag and leather shoe industries will be protected.
We’re sure you’ll understand…
The FTSE 100 closed flat, edging 1 point lower to 5,888 on Friday. The mining sector made solid gains while insurer Aviva was among the main losers, down 4% to 725p on news that it is in talks to buy US life group AmerUS, which is valued at around $2.3bn. For a full market report, see: London market close.
Over in continental Europe, the Paris Cac 40 fell 12 points to 4,953, while the German Dax lost 13 to close at 5,681.
Across the Atlantic, US stocks dived as the latest monthly jobs report showed that although jobs growth slowed, wage inflation picked up. Meanwhile, conglomerate 3M warned that second quarter earnings would miss hopes as sales were lower than hoped, and costs higher. The Dow Jones Industrial Average plunged 134 to 11,090, while the S&P 500 closed 8 points lower at 1,265. The tech-heavy Nasdaq fell 25 to 2,130.
In Asia, the Nikkei 225 rose 245 points to 15,552. The banking sector made strong gains on news that that lending climbed by the most in a decade in June, rising at an annual rate of 1.8%. Meanwhile, banking group Mizuho Financial Group said it will raise the interest rate it charges some of its customers.
This morning, oil was lower in New York, trading at around $73.75 a barrel. Brent crude was also lower, trading at around $72.
Meanwhile, spot gold was down slightly, trading at $628. Silver was a little higher, trading at around $11.30 an ounce.
And in the UK this morning, insurer Standard Life has made a strong debut, rising 6.5% above its offer price of 230p a share in early trading.
And our two recommended articles for today…
The best way to invest in water
– The future of China and India as economic powerhouses could be derailed by one simple thing – a lack of clean water. And they’re not the only countries struggling with water supplies – as Londoners known only too well. But what’s the best way for investors to get exposure to ‘blue gold’? The main thing to remember is – the problem is not so much a lack of water, as a lack of easily accessible, clean water, says Chris Mayers in The Daily Reckoning. To find out which sector stands to benefit from the drive to improve the world’s water infrastructure, click here: The best way to invest in water
Why globalisation isn’t a win-win situation
– The ‘win-win’ theory of globalisation is in real trouble. Tensions are building up between the US and China, as middle-class Americans see their incomes squeezed as low-cost workers on the other side of the world threaten their white collar jobs. Stephen Roach of Morgan Stanley warns that a slide into protectionism is a strong possibility, unless something can be done to resolve the problem. But what? Click here to read his thoughts on a solution: Why globalisation isn’t a win-win situation