The oil shock to the Market
Nicholas Davenport
The sensational fall in equity shares during the last account of the Stock Exchange — if we take the lowest figure of the FT 'thirty' index last week it was a drop of 16 per cent — was entirely due to the Arab shock. No one knew how much they were likely to cut off their supplies of oil from the West. So everyone assumed the worst, got into a panic, imagined that the slump of the 'thirties would be repeated and threw shares overboard.
Sheikh Yamani said at his London press conference last week that his country, Saudi Arabia, would make up any losses suffered by Britain as a result of the embargo on Rotterdam, would exempt Britain from the 5 per cent cut coming in January and would guarantee to maintain UK supplies at the average for the first nine months of 1973 or at the September level, whichever is higher. So far the Arab states have been cutting deliveries by 10 per cent and this makes it awkward for a country like Britain which imports and exports oil. In 1972 we imported and processed around 105 million tons of crude oil. We also imported 20 million tons of products, but exported (including ships' bunkers) 20 million tons. Within the traded 20 million tons we imported naphtha and motor spirit and exported gas and diesel oil. Thus, if the Dutch refineries are closed, we might be short of chemical feed-stocks and motor spirit. Hence the need for petrol ratidning in order to conserve fuel for' the glass-makers and the chemical companies which make _astics. (Naphtha, the chemical 0-stock, is a less pure form of
i. r spirit.) If Sheikh Yamani is
as ooa as his word, and no Whitehall man doubts it, we shall avoid a sharp recession in the chemical and glass making industries by having petrol rationing although their managements have been frightening us with the talk of a 10 per cent cut in oil supplies
meaning 1.20 per cent cut in their Oduction. But there is no doubt We snail De on the right side in our oil supplies.
As it will be many months before a peace settlement is worked otit between Israel and Egypt, uncertainty will remain. In other word it will be impossible to say how much the Government's estimate of a slowing down of growth from 5 per cent to 31 per cent in 1974 will have to be revised. Most economists believe that the economy is already slow ing down of its own accord. Certainly it would be wise to assume that the Gqvernment's estimate fo a gradual slow down to only 34 per cent is over-optimistic. I would . expect 2 per cent.
A recession is a recession, not a 'catastophe.' The only valid reason why an investor might decide to throw shares overboard if he believes that• Britain is ungovernable, that the strong-arm trade unions will continue to disrupt production and deny the efficient
managements the gain in productivity which should follow upon domestic growth and a booming export trade. If he were to look only at the motor industry he might well take that view; if he felt certain that the communist faction in the miners' union or among the power workers were determined to bring on the serious energy crisis which the Arabs threatened and so cause industrial production to grind to a halt, he might well feel justified in selling every British industrial share in his list. But I feel sure he would be acting on a wrong interpretation of the British scene. There is no well laid communist conspiracy to bring our industries to a standstill. There is certainly a crude communist attempt to knock Mr Heath and get him to change his policies and scrap the Industrial Relations Act. He has changed his policies so much since he took office that they must think it is worth trying. But the outstanding feature of the British scene is not conspiracy but muddle — and we have an old tradition for muddling ' through.
The muddle is twofold. First we have run into over-strain or over-heating of the economy— shortage of skilled labour' and materials — because we did not invest in time in labour-saving, technologically Advanced plant. Mr Heath cannot be blamed for this, for he has continually exhorted companies to step up their invcstment. This year at long last industrial investment will be about 7 per cent up and next year about 15 per cent up. But where government can be blamed — this one and the last — is in not investing. in the right steel plant in time. -There is an appalling shortage of steel which is holding up the delivery of finished products abroad. One of our greatest ex
porters — Acrow Engineers — has orders from all over the world and at this moment cannot meet delivery dates because they cannot get enough steel and other materials. It is pathetic that when our products in terms of depreciated sterling are among the most competitive in the world markets we cannot take full advantage of the boom in the export trade. Next year world trade will be slowing down.
Second, the timing of our entry into the European Common Market was unfortunate. As soon as the tariffs were reduced in April the European manufacturers were able to supply the British market with goods which were in short supply at home. The EEC proportion of total manufactures imported began to rise there from. The Government claims that the rise in the volume of imports has been slower than the rise in the volume of exports but an import total of around E15,000 million a year is a devilish bill to pay when exports provide under 62,000 million.
When we get our own oil production flowing from the North Sea we shall be freed both from an energy crisis and a balance of payments crisis, but this will not be before 1975. We have therefore got two bad years ahead for the balance of payments. We shall need huge loans from abroad. So far this year we have borrowed for our public authorities nearly $2,500 million but that is for capital account — not for paying the deficit on the balance of payments although it is credited to the dollar reserves. Where else should we look for help to tide us over the two lean years but to Saudi Arabia, Kuwait, Iran and the other oil producers who could well make us advances against the sophisticated British manufactures they need? It is not without significance that an industrial mission, headed by Mr Vigier of Acrow Engineers, has just returned from Iran with promises of huge machinery orders to follow.
Meanwhile we must remain in a bear market. The bull market had a good run for over a year up to 543 in May 1972 — a rise of nearly 80 per cent — and on Monday last week it had fallen to 363 —, a fall of a third. The average price earnings ratio has come down form over 20 to under 12 at 363. Historically this would be a normal level from which to expect a recovery but conditions are not normal. As a result of the energy crisis America, Japan and Germany are expecting very little growth next year and this slow down in world trade could bring the export boom — of which we have failed to take full advantage
to a halt. Our long-term prospects may be bright but shortterm it is pretty grisly.
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