Oil prices

Oil reached $135 a barrel today and the BBC’s The World at One devoted its entire programme to a well meaning but rather confusing, lightweight analysis of the problem.

Ten years ago the price was $10. But the point of my giving that figure is not to show how much it has gone up. Oil then had collapsed to (in real terms) a disastrous low which no one had foreseen. Those connected with the oil industry, as I was, saw page after page of memoranda, endured hour after hour of meetings, on how to cope with $10 oil for the next ten years, quite possibly (the reports said) more. Equally no one had foreseen the $130 price and it is not set in stone (or I should say in sedimentary rock formations) much less the apocalyptic $200 a barrel forecasts that have been bandied about.

What’s happening? Demand from the Chinese, some have said: if every Chinese bought a motorbike we’d be.. gosh, I don’t know where...(buying motorcycle manufacturers’ shares, perhaps). But no, the growth in Chinese and indeed global demand has been declining. Yes, declining. There’s the fall in the dollar which seems to have been worth $25-30 a barrel (for us Europeans). There’s interruption of supply in Nigeria and Iraq, which is a problem, and there’s speculation: nerves and ambition. My end of year forecast was that the price would come off, and I still see little in the way of fundamentals to keep it so high.

Some of the environmental nutters say this is the endgame, a slow decline in the world’s reserves leading to catastrophic prices. Nonsense. There is still oil. When I was first involved in the industry in the late 1970s they said there were reserves for about 45 years. Now 30 years later there are reserves for about..er..45 years. I remember being told that the production west of Shetland wasn’t viable at less than $40 a barrel; there is oil from shale, in massive quantities, which (people threw up their hands in horror) isn’t viable at less than about $60 a barrel. There’s oil left in established fields that it just wasn’t worth getting out when prices were $10.

Oil is a long term business. It is quite easy to imagine, for people who have seen a whole cycle or two pass before their eyes on the Reuters’ screen, that over the next decade massive investment and then production takes place and then there is too much oil again. We don’t know. In ten years it might be $10 again. The price at the pump? I think it is going to be high (but not much higher and occsionally a fair bit lower) for 2 years. But I don’t know either.

If there is to be massive investment driven by the high prices, Britain (if it still exists then) wants its fair share, so a word of advice to Mr Cameron: if he does become Prime Minister at a time of high oil prices he should guarantee a tax regime to the oil companies for the long term, encouraging them to prospect for more. Mr Brown cheated them by fiddling the duties and they never trusted him again. When you invest for 25 years and more, trust is important.