Outlook: Don't bet on quick recovery for oil

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The Independent Online
WHEN ENTERPRISE OIL was privatised in the 1980s, a dollar bought you a pound and oil was trading at something over $30 a barrel. For every barrel of oil it sold, Enterprise therefore made more than pounds 30. Today oil trades at little more than $11 a barrel and a pound is worth $1.65, so Enterprise is getting less than pounds 7 a barrel for its oil. There could scarcely be a more chilling illustration of the deep recession which now afflicts the British, and indeed world oil industry, than these bald figures.

In sterling terms, the industry's raw material sells at less than a quarter of its price in 1984. In real terms, adjusting for inflation, we are looking at the lowest oil price ever, worse than before the oil shock of 1973.

The result is a predictable one. From the giants of the industry down to the smallest tiddlers, everyone is cutting costs and reigning back on exploration and development. Many in the industry describe it as one of the bleakest periods they have ever experienced. At the top end of the industry, BP and Amoco have responded to the challenge with a cost cutting merger. For others, such grand designs may not be possible and as cash flows shrink, fire sales of assets and possibly even bankruptcies may be the order of the day.

Can the industry hope for any respite from OPEC, which begins its annual meeting in Vienna today? The chances look slim. There are too many oil producers outside OPEC these days for it to act as an effective cartel, and in any case, there is a high level of mistrust among members. Saudi Arabia, the biggest producer, isn't going to agree a large cut in production unless it can be sure others will honour their part of the bargain.

The present hiatus in development will hasten the day when supply and demand finally return to balance. By the same token, however, the slump in the Far East has pushed that point further into the future. Any slowdown in the US will delay the cross over point yet further. In the absence of some great global crack down on oil use, which shouldn't altogether be discounted, there will eventually be a recovery in the oil price. But don't bet on it happening any time soon.