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SEPTEMBER 20, 2005

Formula 1 and the price of oil

Oil prices have risen dramatically in recent weeks and on Monday hit $67.39 a barrel. This is below the record high of $70.85 in the immediate aftermath of Hurricane Katrina but still around 45% higher than a year ago. At the same time the International Monetary Fund (IMF) is warning that prices will continue to rise in the course of the next five years because consumption is increasing faster than output.

Economists agree that higher oil prices affect the economy in a number of ways: they reduce the disposable income of consumers, undermining their ability and desire to spend money on goods and services. This can hit profit margins in other industries and that reduces confidence and growth. It is a fact that high oil prices have preceded or coincided with nine of the 10 US recessions since World War II.

The important question is whether the economy, which has been growing since 2001, is stronger enough to absorb a hike in oil prices and on this economists do not agree. There is an argument that the oil price is not as bad as it looks and that, taking inflation into account, prices are far below the highs of the 1970s and early 1980s when the oil price would have been in the $90 bracket at today's values.

There is also an argument which suggests that Hurricane Katrina, while apparently hurting the US economy, may result in a huge boom as rebuilding gets under way. There are also arguments that as the economy is more efficient and stronger than in the early 1980s, the effect of the oil price hikes will not have the same effect.

Time will tell. Finding sponsorship for F1 is not an easy business at the best of times and recession will not help as consumer-related companies may cut back if their profit-margins are being hit. Conversely, the sport is well-placed to do well when oil prices are surging. Oil companies are natural partners of racing teams and as oil company profits soar they are more likely to invest in F1. The bad news is that oil companies are not charity organisations and that they like to use sponsorships to leverage other deals, such as original supply deals with motor manufacturers. This means that if more money does come to F1 from the oil industry, it is likely to go to the big manufacturer teams rather than the smaller teams that need the money.