Kiran Stacey Moody’s: Oil will continue to rise

As the oil price continues to soar, taking it to record sterling highs, governments are starting to fret.

In the UK, the chancellor was last month pushed to offer a 1p cut in fuel duty to offset the impact of higher oil prices. The opposition claimed on Tuesday the cut has already been erased by the rise in oil since then, and it is no coincidence that on the same day, the energy secretary Chris Huhne met the Saudis to talk about what can be done on the supply side.

In the US meanwhile, Barack Obama has talked about weaning the country off its oil imports to improve energy security.

But none of this activity is likely to have a bearing on the oil price, says Moody’s, which predicts that it will continue to rise as markets start incorporating a higher political risk premium into their commodities valuations.

This seems an unexpected conclusion, given that the risks of producing oil in politically unstable parts of the world are surely well known already. But the argument would help explain why the oil price has risen so much since the beginning of the conlift in Libya, which only produces around 2 per cent of the world’s daily oil output.

And where is this extra money going to go? According to Moody’s, it’s good news for investors, if not for consumers:

US companies ExxonMobil, Chevron and Conoco Philips are likely to use cash flow to pay bigger dividends and engage in share repurchases.