Oil shares and the war
Nicholas Davenport
The Israelis have kept their nerve, the stoat markets have kept their nerve, and if there is a cease-fire fairly soon, assuming that the Arab attacks have been beaten off, there should be a return of confidence in the investment world, But no great upswing. It is understood that Jewish families who have volunteered to contribute to their cause have put blocks of shares into a reserve fund on which bank money has been advanced. No shares have been sold and nd blocks are likely to be thrown on the market to cause prices to fall, but it is well to bear in mind that this Middle East war may bring a certain amount of liquidation in all western stock exchanges where Jewish capital is sizeable.
The oil share market has, of course, suffered already and, I think, to an unjustifiable extent. The Arab oil producing states are raising their prices but these will be passed on to the consumer. No government is likely to prevent the oil companies from passing on the whole of the rises because it will suit governments — particularly the British — to cut down consumption and reduce their import bill.
The increases in price already imposed by the Arabs could have a serious immediate effect upon our balance of payments. The price of a barrel of oil has gone up from $3 to $4.25 per barrel. Ten countries in the Middle East have changed the method of charging for their oil. The effect is to raise income tax and royalty payments to the host governments from $1.75 to $3 per barrel, which is a 70 per cent increase! You may be sure that if the Middle East countries set this lead in soaking their customers, other countries will follow — certainly the African countries.
In 1973 the UK will consume about 120 million tons of oil. If these extra charges were added to the lot it would mean an additional £450 million to the cost of our imports. But, of course, it will not work out exactly like that. We will turn some power Stations from oil to coal and we may cut down petrol consumption by some form of rationing. Incidentally, the Government will have to consider reducing the tax on fuel oil and petrol in order to avoid adding to our cost inflation. The tax on fuel oil only brings in about £100 million but the taxes on other oil products about £1,500 million. There is scope for cuts here, especially as the Inland Revenue is raking in many extra millions through VAT and other sources of revenue. There is always a considerable 'fiscal drag' when inflation is boosting incomes.
The Arab threat to cut oil supplies to countries sympathetic to Israel by 5 per cent should not be taken seriously. They will need all the money they can get from oil exporting in order to pay for their very costly war. And the temporary cut back of 10 per cent in production imposed by that old fox King Faisal of Saudi Arabia might well be offset by Iran increasing her exports. There is no love lost between the desert King and the Shah of Shahs. Curiously the UK is slightly less dependent on the Middle East (including Iran) for its oil supplies than Western Europe — namely 53 per cent against 61 per cent, but if North Africa is included there is not much in it, namely 76 per cent against 79 per cent. The American dependence is minimal — 4.7 per cent — which means that Mr Nixon can cock a snook at the Arab sheiks.
Looking ahead to 1975 the UK will be far less dependent on the Middle East because the taps from the North Sea oil fields will begin to be turned on. As a geology enthusiast I regarded the discovery of oil in the North Sea as the most exciting event of 1969/70. No one had ever expected to find oil in the middle of the sea between the igneous rocks of Scotland and Norway. But the drills got down to the sandstones and limestones of the Cretaceous and Jurassic periods — some 120 to 140 million years ago — when the marine life in those early seas had been deposited, trapped and overlain by rocks of later periods. Oilfields of the Jurassic are often the most prolific, as the Middle East fields have proved, and there is hope that those discovered in the upper North Sea area off the Shetlands, namely the Brent, Halibut and Cormorant fields, will be capable of a large and longlived output. The fields lower down off Aberdeen — Forties, Montrose, Josephine, Argyll and Ekofisk — may also be fairly prolific. Incidentally, the gas fields discovered in the lower part of the North Sea come from the top of the coal measures 250 million years old.,
No forecast of outputs has been published except for the Forties field — 400,000 barrels a day but it is believed that by 1980 the production from the fields already discovered will be from 11 to 2 million barrels a day. Current demand in the UK is'around two million barrels a day and may rise to three million barrels a day by 1980. The financial benefits of the North Sea oil discoveries are therefore of immense national importance, that is, for our balance of payments, but for the oil producing companies the profits are shorn by the heavy extra cost of drilling in deep sea water and bringing the oil by pipeline to the coast. The Arab drive to exact higher prices for their crude oil is kw the oil producers a blessing in disguise. The well-head price of Ekofisk oil was fixed in 1972 at $2.95. It could be reasonably profitable at $4.25 per barrel — perhaps with a profit margin of $1.
In spite of their sharp recovery in profits this year, the leading oil shares have fared badly in the market. Shell has fallen by 30 per cent, BP by 20 per cent and Burmah by 23 per cent. The discoveries which have been made by BP and Shell in the North Sea make very little difference to their over-all profitability. BP is,' of course, the most affected by the Middle East threat. If this threat persists the importance of the North Sea development becomes of more significance for BP. Its Forties field, which is due to start production in 1975, is assessed by. some brokers to put an additibnal 100p on the price of BP shares. Incidentally,the Alaskan development, so long delayed, is at last coming forward and this too is said to put another 100p on BP Shares. So, when the war ends and the recovery in the oil share market follows, the sharpest gain may be seen in BP. But Shell should not lag far behind.
Gambles in the smaller companies participating in consortia drilling in the North Sea are not to be recommended but I would draw Nephew Wilde's attention to an extraordinary situation in the industrial market. A company called AAH (Amalgamated Anthracite Holdings) is quoted at 182 to yield 6 per cent on a price-earnings ratio of 10i. It has been as high as 262 this year. It has a 10 per cent interest in a consortium drilling in Block 29/16. This might mean something — or again nothing — to a market capitalisation of under £10 million.
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