“To be honest, we find it hard to explain the oil prices. At the end of the day you don’t see anybody queuing for gasoline, or any shortages. Inventories are well supplied and refining margins have been lower, which is an indication of a well-supplied market.” And with those words, Peter Voser, Chief Financial Officer for Royal Dutch Shell hit the nail on the head.
Oil surged again yesterday, this time passing $90, and then some. When we took our daily reading from the New York Mercantile Exchange, the black stuff was just one cent short of $91. That’s almost $40 up on the year-low, seen in January. And yet, many in the oil industry are perplexed. Why is it so high?
Mr Voser says this price seems to be driven by speculation, and also has a political premium in it.
The oil industry insists there is plenty of oil out there lurking in the ground, and sooner or later prices will plummet. No doubt they are right to assume falling oil prices; any prudent business model, has worse case scenarios - (are you listening, banks). But the oil firms do seem quite definite in their prediction of lower oil prices in the years ahead - this is no worse case scenario - it’s what they expect.
Then again, maybe the oil companies are not quite as switched on to these things as they should be. After all, profits from Royal Dutch Shell and BP, at a time when they should be raking in the bucks, have been a big disappointment.
Yesterday, Shell revealed its profits - and they were nowhere near as good as you would have expected, considering. Sure, at $6.92 billion, net profits were up 16 per cent on last year. But they were a tad lucky. The price of oil shot up at just that stage in the quarter, so that the company benefited from the price hikes at the time of sales, but did not pay the extra price at the time the oil was pumped out. If you measure profits based on the current cost of supply, then actually profits were down by around 6 per cent on a year ago.
It’s all down to higher costs of supply and what the company calls “weaker refining margins,” which it says are currently a problem across the industry.
And just at the time when oil was breaking new records, the company’s production of oil and gas was falling - down 3.4 per cent.
Mind you, things were a whole lot worse at BP. In fact right now, bad news seems to be gushing forth from the pipelines of BP’s PR machine.
Profits in its third quarter were down a horrific 45 per cent - with oil and gas production 4 per cent down on the same period a year ago. Then on Wednesday it announced plans to cut 350 jobs from its North Sea headquarters in Aberdeen. Okay, the job cuts were all about the company trying to streamline the business, making it more efficient and then profitable. Even so, they illustrated how bloated the company’s management structure had become.
Then yesterday, it emerged the US government, via its Department of Justice, is to fine the company $373 million. The fine related to the fire in Texas, which claimed 15 lives.
So, all in all, then, the two oil giants need to thank their lucky stars oil is so high.
Many believe it’s inevitable that oil will fall in price soon. If you look at the history of oil prices, whenever it has shot up in price it has fallen quite rapidly soon after. There is, in effect, a natural cycle. When the price is high, exploration rises, causing an increase in production down the line. At the same time the high price of oil causes the global economy to slow.
Just when higher oil supply kicks in, global demand has often started to fall, because of the high prices causing economic difficulties, so suddenly the world goes into reverse, and the price of oil falls - sometimes like a lead balloon. Production costs are cut, until the world finds itself booming again, thanks to cheaper oil, and the cycle starts all over again.
But this time things are very different.
The rise of China and India seems set to continue - demand for oil is set to rise year in year out. And despite the oil industry making noises about how there’s lots of oil out there, so far, it has not done so well in finding it.
Earlier this week, Germany’s Energy Watch Group released a report suggesting that oil production has already peaked. The report said that oil production will fall by 7 per cent a year from now on.
Right now, the global economy is experiencing a remarkable change - as the two most populous countries on the planet slowly join the ranks of the developed economies. Meanwhile, year in year out, we continue to drag out from the earth the product of billions of years of formation. It has been estimated that every year, we consume a million years of production. Imagine the earth’s natural resources are allowed for in a balance sheet. The rate at which our natural assets are being formed is running at 0.0001 per cent the rate of our consumption, or so it would appear.
Maybe oil will fall back, and tumble to the kind of lows seen a few years ago, but to assume that the oil price cycle will continue for very much longer seems na#35;1111;ve in the extreme. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link
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