In the City
The oil glut
Tony Rudd
The first law of economics in the real as distinct from the academic world is that prices move up like quicksilver and down like glue. We are now being treated to a classic example of this law in action. There is and has been now for some months a world glut of both crude oil and refined products yet prices of the latter to the consumer are still rising, witness the extra 5p a gallon on petrol shortly to come into force in the UK.
Basically it is the old problem, which at its simplest can be seen in the market for " products like vegetables: in a period of glut the producers get less and less and yet as often as not the prices in the shops continue to climb. Some perverse miracle seems to keep the two apart.
In the case of oil the motorist driving along the MI listening to his radio hears that the spot price for oil cargoes is plummeting but he can't take advantage of it because what he has to fill up with at the service station isn't crude but petrol. And most of that seems to be supplied by a few extremely well-known international names who move in a unison so close that they appear to be activated by a single piece of string. There are a few minor operators undercutting the general price level but their reference level is the oligopoly price charged by the rest.
Yet the petrol example is not wholly typical of what is happening in the oil industry. It is estimated, apparently, that a barrel of crude oil when broken up into its constituent refined parts has an overall value, taking the current market prices for the separate parts, of a mere $29. This compares with a price of $32, which is the cheapest official crude oil available from the Middle East, and with a price of just under $35 a barrel which is what North Sea oil is now officially marketed at (having been cut to this level in Monday's announcement). Thus anybody so unfortunate or foolish as to buy crude at present official prices is in for a minimum loss of $3 and a maximum of what appears to be around $6 per barrel. Obviously the oil companies where they have (or think they have) a captive market must get every penny's worth of value out of it in compensation for what they are losing elsewhere.
However the real question is whether the current situation can last. There is a granite-like complacency about all the major oil companies on this issue and none harder of course than the complacency of BNOC. Whether the present oil price structure can last, however, is basically a matter of time. The position is being eroded every minute. But the industry has so much to lose from a collapse in prices that it is bound to resist further falls with every marketing weapon at its disposal.
The crucial question of timing turns, of course, on-supply. The Saudi Arabians are deliberately pumping more oil than world demand can cope with during the present economic recession. They are doing this with the deliberate intention of reestablishing their price leadership and eliminating the wide range of prices as between various OPEC members. If they go on with their policy there is ultimately no reason why any consumer will buy at a price higher than the Saudi price, except where there is a justifiable premium in respect of quality. Already this is bringing the socalled 'price hawks' to heel. Countries like Libya and Nigeria are said to be offering substantial discounts from their official prices. And it has now forced North Sea oil down by several dollars a barrel to keep in line with other world prices. What Lord Kearton must be praying for is either a cessation of the current Saudi policy or a nasty little outbreak of war somewhere in the Middle East. Last week it was a matter of either trying to catch King Khaled or a member of his suite between meetings at Claridge's or placing a bet on the Libyans staging an air-raid on Israel's atomic plant. Each week that goes by without some prospect of supply being cut back brings a collapse in the present market structure that much nearer.
If this happens it could be really dramatic. It's always the same in situations where suppliers have been trying to keep up the prices when the economic laws of gravity are pulling them down. When the fall does eventually take place it occurs with amazing momentum, going further than would have been the case had the process been allowed to occur naturally and gradually. It was of course the same the other way around. Oil prices having been kept down to well below their economic level throughout the postwar period by the self-same oligopoly that is now trying to keep them up, the price rise, when it came, was shattering. If oil prices do drop into the $20 a barrel range some will be major gainers and others major losers. The gainers will of course be the consumers. There will be great rejoicing in America and Japan. Similarly the nonoil-producing countries of the Third World (the non-oil LDCs) will breathe an enormous sigh of relief. All oil producers except Saudi Arabia will be hurt and will seek vengeance directly demands start to pick.uP again. For they have nearly all become dependent on oil prices of the kind reached last year, at the peak. In this respect the United Kingdom will be in exactly the same predicament as, for instance, Nigeria. Per versely Saudi Arabia will be quite happY with the situation because the country's financial resources are already so enormous that a year or so of lower revenues (and lower oil sales) will do little long-term harm.
Politically, of course, the situation will do the Saudis a great deal of long-term good as the rest of the oil producing world (including the UK) is forced to fall in behind them. At that point the motorist on the Ml should at last start to gain some benefit from plummeting petrol prices. The great question then will be whether consumers in the western world will keep up their recentlY: found tendency to economise on all oil products or whether they will go back to the bad old habits they had before 1973.
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