Oil price - Financial Times Lex Column, August 18
It is the middle of summer; Opec has raised its production quotas twice this year, and yet oil prices are back above Dollars 30 a barrel.
Robust demand is partly to blame, but the high oil price is really a supply issue - and on two fronts. First, apart from Saudi Arabia, Opec has run out of capacity. Four of the cartel's 10 members have so far failed to produce up to the new output ceilings set in June. Instead of the agreed 700,000 barrel a day increase, only about 300,000 bpd are reaching the market. Second, non-Opec output is also below plan. The International Energy Agency expects this to grow by 2.9 per cent this year.
But new work by Merrill Lynch shows that global production from the major international oil companies actually fell 0.4 per cent in the first half of 2000. This combination has prevented the usual, seasonal rebuilding of stocks and thus driven up the price. Nor will these supply constraints ease quickly, even if Opec agrees to another quota increase next month. That suggests a high oil price - one in the mid-Dollars 20s - could be with us for several years.
For oil companies this means another round of earnings upgrades - something that the sector, currently trading at a 50 per cent discount to the S&P 500 index, has yet to get credit for. More intriguing are the macro-economic effects. So far, a rising oil price has neither restrained world economic growth nor triggered inflation. But if it stays this high for much longer, it cannot help but slow consumption, particularly in the US. Ironically, Opec may end up doing some of Alan Greenspan's job for him. |
