Oil skid ahead

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September 3 2000 BUSINESS NEWS

Prices are set to rise again this winter. By David Smith and David Parsley

Oil skid ahead

JUST 18 months ago the oil sector was bemoaning a low oil price and the doomsayers were predicting that the crude price, then below $10 a barrel, might hit a new all-time low of $6 a barrel.

Oil majors such as Royal Dutch/Shell, BP Amoco and Texaco were demanding cuts in petroleum revenue tax (PRT), the government's main North Sea tax, so they could make a profit on the oil they were producing. The situation, we were led to believe, was dire.

Today the oil price has bounced decisively back above $30 a barrel, despite the efforts of Saudi Arabia and some of the other members of (the Organisation of Petroleum Exporting Countries (Opec), to steer it lower.

The fear, indeed, is that prices could head even higher over the winter months. Oil stocks are low, just as the big consuming countries move into winter. Earlier in the summer petrol shortages in America helped to push crude prices sharply higher as the refiners scrambled for supplies. Now, say analysts, the same thing could happen again because of a supply squeeze in the heating- oil market. And if Europe and America look to be heading into a severe winter, the upward spike for oil prices could be sharp, with some predicting $40 or even $50 a barrel.

"We know that there is plenty of oil in tankers, steaming towards the main markets, and we know that $3 or $4 of the present price reflects pure speculation," says one industry executive. "The question is whether the oil gets there in time to head off further speculative rises in the price."

Part of the problem has been created by the dynamics of the market itself. For the oil majors that hold most of the stocks, the sharp rise in crude prices has made it expensive and unprofitable to do so. They have had an incentive to operate on low stock levels until spot and futures prices for crude move back into line.

Opec, meanwhile, seems no better at controlling the market at a time of sharply rising prices than it was when oil was tumbling in value. Last week Saudi Arabia called for a "suitable" increase in output to be agreed when the cartel meets on September 10. It has pledged a 500,000 barrel a day rise in output to try to calm the market.

Not all Opec members are, however, sympathetic, fearing that increasing production would play into the hands of the West by pushing prices sharply lower. Iraq's recent output has been low.

Whatever the prospects, the economic effects of higher oil prices are already apparent. The European Central Bank, which on Thursday raised the cost of borrowing, has presided over a near-doubling of interest rates in little more than six months, because the combination of dearer oil and a weak euro has pushed inflation above its target ceiling of 2%. Higher rates have also pushed up British inflation, which had threatened to drop below the Bank of England's target "floor" of 1.5%.

Some believe that the economic impact of the latest spike in oil prices, which is now taking on an air of permanence, has further to run.

More than a quarter of a century ago, oil derailed the global economy when Opec quadrupled crude prices. Some economists believe that history could repeat itself.

Andrew Oswald, a Warwick University economics professor, notes that every previous episode of sharply higher oil prices has been followed by recession - in the 1970s, early 1980s and early 1990s. Recent signs of an economic slowdown in America, he believes, could be the signal that a similar oil impact is starting to show through now.

Forecourt felony: more customers are now filling up and driving away without paying The most visible effect, meanwhile, is at the petrol pumps. Last week Laurent Fabius, the French finance minister, announced cuts in the cost of domestic heating oil and in motoring taxes to offset rising oil prices. The pressure on Gordon Brown to follow suit by cutting petrol duties will intensify in the run-up to his pre-budget report in November.

Already the average price of petrol in Britain is at 80.3p a litre, almost 12p more than in France, the next most expensive in Europe, and almost 30p more than in the Netherlands.

Last month's Dump the Pump Campaign targeted groups such as BP in an attempt to force prices down. While all the companies claim this campaign failed, petrol prices actually went down by about 4p a litre during August. Last week, however, most companies bowed to the inevitable in the light of the renewed rise in crude prices and announced a 2p rise.

Peter Regnier, director of Oil Price Assessments Limited (Opal), a London-based research group, says that recent shifts in world oil prices have underlined the fact that tax is to blame for the high cost of fuel in Britain.

"If you take all the taxes out of the petrol price then our figures for late August show that the UK actually has the cheapest fuel in Europe," says Regnier. "The margins on petrol in the UK are tiny compared to other European countries. With almost every European government awash with money it does seem ridiculous that the British government is hammering the motorist so hard."

Even at present levels, petrol is becoming a coveted commodity. Service stations report a sharp increase in petrol thefts - motorists filling up and then driving away without paying. Some now insist, particularly at night, on payment in advance.

Last week James Frost, chairman of Save Group, one of the few remaining independent chains of petrol stations, raised prices after claiming that his company could no longer afford to keep prices as low as they were. He explains that since the Dump the Pump campaign petrol prices, led by Morrisons, the supermarket, have fallen by about 4p.

While BP has 1,500 liveried stations in Britain, fewer than half are owned and run by the company itself. Most, as with other oil groups, are run by individuals on a licence from the oil major. Therefore, according to Frost, the independent retailer is hit the hardest.

"If you also consider that the Platts Oil Gram price, the actual cost price of refined petrol, has gone up 3.2p in the same period that the pump price has come down 4p," says Frost, "we are actually more than 7p down on every litre of petrol we sell. It is the petrol retailer who is suffering hardest. The big oil firms hide behind their rigs, the government behind their desks. It is our customer-facing cashiers that get it in the neck and the retailers are hit in the pocket. And prices may have to rise by that 7p to put retailers back on track."

A leading analyst says: "The oil companies actually own and run only a minority of their petrol stations. That is why they appear unbothered by rising petrol prices, although those that keep their prices a low as possible for as long as possible, as BP is doing by not following the 2p rise immediately, may attract a few more customers into their petrol-station shops. The non-petrol retail element of the stations is really the only area in which they can make money."

BP, which did not join with Shell and Esso in raising prices last week, appears to be pursuing a strategy of remaining competitive with the supermarkets, which have proved themselves in recent weeks to be the real price-setters in the market.

As Morrisons reduced its prices last month Tesco and Sainsbury soon followed suit and this led to the oil majors reducing their prices.

Rob Holloway, a director at the Petrol Retailers Association, believes the power of the supermarkets means the profit margins on petrol will remain below 4.5p a litre for the foreseeable future.

"While the supermarkets were happy to make profits from petrol early this year when margins got above 6p they quickly slashed prices," he said. "They are always the first to do so and everyone else is forced to follow suit."

The supermarkets may continue to temper the effects of higher oil prices on Britain's consumers but they cannot buck the market. Unleaded petrol flirted with #4 a gallon (87.9p a litre) earlier in the summer before falling back. Now they are due for a renewed assault on that level over the winter. Whether this and the other effects of higher prices are enough to make the economy skid on oil remains to be seen.

http://www.sunday-times.co.uk/news/pages/sti/2000/09/03/stibusnws02009.html



-- Martin Thompson (mthom1927@aol.com), September 02, 2000

Answers

What I can't understand is why is Norway's production down so much? They are the world's number 2 oil provider, after Saudi Arabia. Put this together with the British off-shore rigs' pipeline problems and it does look like a bleak winter, indeed, for Northern Europe.

-- Billiver (billiver@aol.com), September 03, 2000.

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