Jeremy Warner's Outlook: No one knows where the oil price is heading, but a speculative bubble this is not

Click to follow
The Independent Online

Mr Forbes' prediction may be a foolhardy one, but no major oil company I know of believes the present inflated price will last either. Lord Browne, the chief executive of BP, has gone on record as saying that the price will eventually settle at between $30 and $40 a barrel, though he is not so stupid as to try to predict when.

So if everyone is so confident the price will fall back again, how come it keeps rising in the meantime? Speculative activity is in fact the least likely explanation, though American buying is certainly a part of it. The disruption in Gulf of Mexico production caused by Hurricane Katrina provides most of the answer. Like any other commodity, oil is from time to time influenced by speculative factors, but most of all it is driven by the law of supply and demand. With the world economy still growing at well above trend, demand has remained strong, but the development of new sources of supply has lagged.

New supply usually take years to develop, and in the meantime the oil industry runs an incredibly tight ship with little in the way of unused stock to cushion any shortfall. In these circumstances, any disruption can have a dramatic effect. Quite apart from its human cost, it is already plain that Hurricane Katrina has inflicted very considerable damage to a whole swathe of Gulf of Mexico production facilities, a major source of supply for the US. It's going to take time to clear up the mess; nobody yet knows how long or at what cost, but even with America digging into its strategic reserve to satisfy demand, the short-term position looks dire.

Logically, the oil industry must be right in believing oil prices will eventually fall back again, though perhaps not as far as they have done in past cycles. Yet there are a number of unknowns this time around which may disrupt the old paradigm.

One is the massive new source of demand coming from China, India and other parts of the developing world. There's no reason to believe this is going to ease any time soon. Few yet think the world economy is about to enter a downturn. In fact, most forecasters predict stronger growth next year .

There are big unknowns on the supply side of the equation too. How much oil is left and how costly might it be to extract? Over the next two to three years, quite a bit of new capacity is due to be brought on stream, both by Opec and the oil majors. This might ease supply constraints to some degree, but possibly not by enough if Chinese demand remains robust.

Quite how much cheap oil there is left to extract is anyone's guess. Few in the oil industry yet see any reason to raise their benchmarks for new oil development. BP and others claim to have quite enough development projects that wash their faces at $25 a barrel to keep them busy for years to come.

Yet the fact remains that even BP is expending its oil reserves faster than it is replacing them. For some other oil majors, the position is much more serious. This is likely to be true of most oil producing nations as well, though reliable figures are hard to come by. All are living on borrowed time.

In past cycles, high oil prices have always proved self correcting, not just because they spur users on to greater fuel efficiency, but also because they help to trigger recession and a consequent collapse in demand. The new ingredient this time around is China, whose determination to industrialise seems to know no bounds.

Still, no matter. However much short-term economic damage high oil prices do to us, in the long term they are very much to be welcomed as they force consumers to think about using less. With each new trough in the oil price, the gas guzzlers inevitably return, but never to the same degree. The world is becoming steadily more efficient in its use of energy. Dearer oil might be thought a small price to pay if it helps save the planet.

Best to talk as Saint-Gobain goes hostile

To most of us, BPB is just a boring old plasterboard manufacturer, yet Richard Cousins, the chief executive, would much rather you thought of it as a go-go growth stock, a world leader in its industry, and a company for Britain to be proud of. Whether this cuts any ice with his shareholders remains to be seen, but as Saint-Gobain of France finally went hostile with its £3.7bn offer for the company yesterday, I'm not sure I rate his chances.

Saint-Gobain's chairman, Jean-Louis Beffa, has three times attempted to engage Mr Cousins in constructive talks at this price, but each time been rebuffed. Nor is Mr Cousins just playing hard to get, with every intention of caving in if he can squeeze just a little more out of his Gallic assailant. Never mind that the bid is already a 40.5 per cent premium to the pre-offer price, or that at 19 times earnings equates to a multiple which compares very favourably to other transactions in the sector, he genuinely believes the business to be worth a lot more.

How so? Well for starters, BPB is the biggest plasterboard manufacturer in the world, accounting for about one in every five boards sold. What's more, this is a growth business, not just in the emerging markets of Asia, but even in sclerotic old Europe, where per capita use of plasterboard is still far lower than the US and growing strongly. There's simply no comparison with other takeovers in the building materials sector, he insists. Both Aggregate Industries and RMC were a lot further down the value chain, nor are they in any way world leaders.

Mr Cousins' frustration is understandable. There was little enthusiasm in the City for Mr Cousins when he was appointed as chief executive five years ago, yet he has confounded the sceptics to produce a steadily growing business and a share price to match. He deserves to be backed. The problem he's got is that 720p a share is a very handsome price, and though the stock is trading a bit higher in the stock market, this is only because traders believe he could squeeze a little bit more out of Saint-Gobain for agreement. There are no obvious rivals out there - Lafarge would encounter big competition issues were it to bid - and nobody believes the shares would sustain this price in the absence of the Saint-Gobain offer.

Mr Cousins has already largely shot his bolt on the defence by promising a 44 per cent rise in the dividend and a 70p-a-share return of capital. I doubt that going further, and embarking on a scorched earth defence of even greater capital return, would work. Furthermore, there's every likelihood that Saint-Gobain is already overpaying in offering such a premium. There are few cost cutting synergies to be gained from this deal, which looks to be a pure empire-building exercise.

With some justification, Mr Cousins complains that even if his company were big enough, the French government would never allow him to take over Saint-Gobain, a view seemingly confirmed this week by remarks from the French industry minister, François Loos, to the effect that French strategic industries need protecting from foreign buyers.

Again, Mr Cousins' frustration is understandable. This lack of reciprocity is indeed a cause for concern in what is today meant to be a single European market in capital, yet it is not a cause for action. One of the reasons Britain is growing and prosperous is that it has an open door approach to inward investment. One of the reasons the French economy has stagnated is that it surrounds its industries and labour force with a myriad of protections, as if the present can be set in concrete and preserved for all time. Perhaps regrettably for Mr Cousins, it can't be, but that's Britain's gain and very likely Saint-Gobain's loss.