Oil price batters industry

BRITAIN's manufacturers are not likely to share policymakers' sanguine views on the soaring oil price. Brian Cooke, the chairman of West Midlands foundry group Castings, was the authentic voice of industry when he bemoaned his burgeoning fuel costs.

It is doubtful whether he found much consolation in Bank of England governor Mervyn King's view that the situation is nowhere near as bad as it was in the 1970s.

In dollar terms, oil prices have risen more than 50% since May last year. They have been driven skywards because there are fears that supply may not meet the seemingly insatiable demand from China and other infant Hercules economies.

The margin of spare capacity is wafer thin and in recent weeks tensions in Iraq, the Yukos crisis in Russia and the Venezuelan presidential elections have all triggered supply scares.

King is right to point out that the impact on the UK economy is likely to be muted compared to the oil shocks of the 1970s and 1980s.

Although nominally high, prices are still a long way shy of their earlier peaks in real terms, after adjusting for inflation.

In general, oil makes up a much smaller part of firms' total costs than it did in the past. That partly reflects the fact that the price of oil is lower in relation to general retail prices. It is also a consequence of the shift away from heavy industry and towards dotcoms and services.

But the pain being felt by our long-suffering metal-bashers is real. Small and medium manufacdoubtturers are already seeing their fragile profitability battered by rising interest rates, spiralling pensions costs, a welter of government red tape and a tide of expensive 'family-friendly' initiatives. Oil prices must seem like the final straw.

In many cases, firms face cut-throat competition from lower-wage nations, leaving little scope for them to pass on increased costs to their customers.

The green lobby will no suggest they look at environmentally-friendly solutions and reduce their reliance on oil.

In the short term, though, there is little that many firms can realistically do to curb their fuel bills.

Investment bank Schroders predicts that - provided there are no serious and lasting disruptions to supply - oil prices will fall. The only question is when.

Cooke and his fellows can only hope that it is sooner rather than later.

Bring Crosby

THE City's excitement that James Crosby of HBOS is preparing to bring out a counterbid for Abbey has spilled over into the rest of the bank sector.

Markets were alive with talk that Lloyds TSB is about to merge with Germany's Deutsche Bank, though do not hold your breath.

HSBC is apparently mulling a bid for Japanese consumer lender UFJ and suggestions that Barclays is to be swallowed by Citigroup or Bank of America refuse to die down.

A good deal of this is just August gossip. But Crosby is deadly serious about ousting Spain's Banco Santander from pole position in the contest for Abbey.

He has in the past preferred agreed bids to hostile ones and there is no reason to suppose he will change this time. He will be looking to present Abbey with an offer it cannot refuse.

His intervention has put Banco Santander on the back foot. The controlling Botin dynasty has done well for its shareholders, but the Spanish grandees have perhaps become over-used to a climate of deference at home.

Santander needs to address the criticisms being raised over its corporate governance. Though good by Continental standards, Belgian researchers Deminor found that it goes against the guidance from boardroom czar Derek Higgs in a number of respects.

That is a valid concern for Abbey's 1.7m small shareholders, though the best way of winning them over would be to offer more cash.