When you look at the price of petrol on forecourts across England, and the present value of crude oil, it is easy to see why oil was, at one time, referred to as black gold.

With prices having risen steadily for the past two years, how many people remember that in April 2003, crude oil was trading below $25 a barrel? Last week, that same barrel of oil would have cost you close to $60. It is perhaps this historically high price that has led a leading broker to recently predict that we could see oil suddenly jump to $105 per barrel.

There are a number of reasons why prices have risen, the most obvious being supply and demand. While it is relatively easy to calculate demand, the exact details on future supply remains a lot harder and open to a great deal of debate. Although we all know oil is finite, the question of how long supplies will last is a harder question to answer.

Demand for oil has been rising for many years, particularly in developing countries, and especially in China. In 1965, China's peasant economy consumed only 217,000 barrels of oil a day. In 2003, this had increased to six million barrels a day - which is still far short of the US daily consumption of 20 million barrels a day.

Although this strong demand and the subsequent price rise may be bad for consumers, this is certainly not the case for companies that make their money selling oil. Last week, Burren Energy reported an increase in net profits of 146 per cent, due to a combination of increased drilling and the improved price the company received for its oil.

Dragon Oil, which announced its year-end results on the same day, reported an increase in net profits of nearly 73 per cent. This again was due to the high price of oil, as well as successful exploration beginning to pay off.

BP's year-end results, for the same period as Burren Energy and Dragon Oil, were released at the beginning of February. BP announced net profits had increased by more than 50 per cent, producing record profits for the company. This strong performance has continued during the first quarter of this year.

Other companies benefiting from the current climate are D1 Oils and Biofuels, both of which make biodiesel, a green alternative to petrol. While a high oil price may be good news for some, the majority of companies see a direct negative effect on bottom line profits. This is particularly relevant to the transport sector, and nowhere more so than the airline industry

Fortunately, the effect of a high oil prices has been slightly reduced in the UK, due to the weakness of the US dollar. If, however, we were to see the dollar rebound against the pound, companies and consumers across Britain are likely to see the real effect of the current oil price.

Although there is a lot of debate as to future oil supplies, it is now widely believed that prices are unlikely to fall much below $50 a barrel for the foreseeable future. While Opec continues to increase its production in an attempt to lower prices, the majority of countries have very little scope left in which to do this, a problem that will only intensify over the coming years.

- Michael Rankin is an investment manager in the Teesside office of Wise Speke. Views expressed are the author's own and are not necessarily held throughout the Brewin Dolphin Group. Wise Speke is a division of Brewin Dolphin Securities Ltd, a member of the London Stock Exhange, authorised and regulated by the Financial Services Authority. Prices, values or income may fall against investor's interests. You should therefore be aware that you may get less back than you invested. Investments may not always be suitable for all individuals. If you have any doubts, you should consut a professional advisor.

Published: 12/04/2005