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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: A. Geiche who wrote (50411)	9/4/1999 12:21:00 AM
From: Tomas	Read Replies (2) \| Respond to of 95453

"In real terms, the rise in oil prices this year is a third of that in the 1970s" Oiling the cartel's wheels Financial Times, Saturday September 4 Most people thought they would never be able to do it, but they have. After a decade and a half of lying, cheating and squabbling, members of the Organisation of Petroleum Exporting Countries seem to have got their act together. As a result, oil prices have doubled during the past six months, much to the surprise of the biggest oil companies, and it seems to their shareholders. Clever investors who believed the oil cartel meant what it said and could deliver have scooped the pool. Anyone who bought into Shell Transport and Trading at the end of January, for example, could have made a 75 per cent gain by the early summer. Yesterday, the Brent crude oil price became firmer again, after a couple days of dithering about, to close above $21 per barrel and only just below Wednesday's peak of $21.48 - the highest for almost two years. This strength reflects a growing consensus in the oil industry, after a period of scepticism in mid-summer, that higher oil prices are here to stay. Those who were predicting a collapse to around $5 per barrel have been proved clearly wrong for the time being - although the underlying economics of oil production no longer make such a price ridiculous. And a rapid reverse is always possible in a market that depends on the resolution of a few oil ministers to avoid temptation. As the price rises, the pressure to make some extra bucks by opening the taps becomes ever higher. But for the time being there is more confident talk of continued firm discipline in Opec. If this lasts until winter when consumption starts to pick up, might prices then ratchet up again to $30 or more, bringing back bleak memories of 1973-74? After the outbreak of the Yom Kippur war, prices rose from $10 per barrel in 1973 to $36, in terms of today's money. For several reasons a re-run of that grim story is unlikely, but pessimists might note that in real terms, the rise in oil prices this year is a third of that which caused such turmoil to the global economy in the 1970s. Inflationary pressures Yet this time round the steep rise seems hardly to have been noticed in Europe, except by motorists. Even in the US, where price rises are more obvious, because taxes are lower, there has been little sign of alarm. One reason for this - and a big difference from the 1970s - is that inflationary pressures remain extremely subdued. Despite the recent rise in oil and other non-food commodity prices, the Organisation for Economic Co-operation and Development expects inflation to continue to fall in the developed world, to only about 2 per cent next year. Another important difference is that a large part of the world economy is just emerging from the threat of a deflationary recession. The unexpectedly strong signs of recovery in south-east Asia and a better outlook for Europe have helped to raise the demand for oil. It was actually falling slightly last year, but is expected to grow a little in 2000. Excess stocks As a result, the build-up of stocks has been reversed, and some analysts believe excess stocks will be entirely depleted during the autumn. But this would at least be the benign result of continued steady growth - if it can be sustained - in most of the industrialised world. The pressures towards higher oil prices must be set against two factors that mark another huge change since the world of 1973. First, the west has become far less dependent on oil. Six years of prices above $30 (in today's money) in the early 1980s led to big changes in consumption. This reflected not only deliberate policy, such as the encouragement of smaller car engines and improvements in industrial efficiency, but also the fact that energy intensive industries have become a declining part of advanced economies. Second, in the period after 1985, when Opec collapsed and oil prices fluctuated between about $15 and $20, the big oil companies made spectacular efficiency gains. The cost of operating a North Sea oil platform is about $5 per barrel. And the cost of finding and developing a new source of oil has fallen to only about $6. These are less than half the figures in the mid-1980s. Such numbers made the talk of $5 oil seem economically plausible only on the assumption that Opec would remain ineffective. However, the severe economic difficulties of many oil producing countries, such as Nigeria and Venezuela, appear to make discipline more likely. And although Opec countries produce only about 40 per cent of the world's oil at present, they have nearly three-quarters of reserves. The question of when Opec will be able to exploit this power again is back on the agenda. Six months ago it was a safe bet to say: "never". Now the punters are not so sure.