Do you ever read BBC economics chap Robert Peston’s blog on the BBC website? I do because it provides some interesting insight into how the City is thinking or – as recent events would seem to prove – not thinking.
I have to say, though, I’m now finding recent events in the financial sector really quite depressing, and the news does not seem to improve. A couple of times in the past I’ve written that I thought bankers and others were a pretty useless bunch, but I think it’s now fair to say that they have proven to be a major threat to our economic stability and to our industrial future.
The lack of intuition and simple risk management techniques in a sector of such critical importance is really quite astonishing. Now, it’s really like watching a train crash in slow motion. Every time you think it’s over another train appears out of the tunnel and smashes into the ever-growing pile of debris.
The trouble is, of course, that the impact of the consequences of the greed, short-termism and utter incompetence of these people on the energy industry could prove disastrous.
Firstly, a recent report on UK clean technology start-ups published jointly by Greenbang.com and the University of Bath suggests strongly that a large percentage of companies are thinking of moving overseas because of the increasing difficulty of raising risk equity capital here.
Ironically, it would seem that people consider it much more likely to be able to raise capital and build a business in the US. Ironic because, of course, this is where the so-called credit crunch originated.
Secondly, the number of investment banks is shrinking fast. This is going to make raising capital or loans to support mergers and acquisitions a lot more difficult. That’s if you need to raise the money, of course. Some companies don’t, although they may, for the time being at least, prefer to hang on to their cash. I think I would.
Thirdly, the weakness of the general banking sector, as exemplified by their reluctance to lend to each other – which has resulted in, among other things, the acquisition/merger of Lloyds TSB with HBOS – may make it more difficult for smaller oil companies to raise funds to support their exploration and production development programmes.
Then there is the fact that the credit crunch has contributed to incredible volatility in the oil price. OK, it’s not as if the oil price is low. $100 is still very high compared with what it was just a few years ago.
But the fact that it can surge from $100 to $125 and back again in the course of less than 24 hours, as it did recently, does not provide the sort of stability that oil companies like to see before committing to major investments.
The reason given for that sudden surge is that it seems there was an assumption, because Capitol Hill in Washington was setting up a deal with the US banks to take out all their “toxic debt”, that demand would rise as economic activity picked up again.
The sudden realisation that this deal was some way off then pushed the price back down again. Staggering.
But it’s a fact that now we have a situation where the “economic turmoil” has apparently driven down demand by around one million barrels per day and Opec production has been throttled back by at least a few hundred thousand bpd.
The big question then is whether or not demand is going to recover to what we think of as normal, and if so, when. The issue is, of course, that if the main consumer economies of the world don’t get back on track soon and oil demand recovers then this will suppress investment in new exploration and production, and that means there will be a downturn in the demand for oilfield services.
As has happened before, this could result in both expertise and assets being lost from the industry forever, and that would make it difficult to match supply with any improved demand.
It would also almost certainly mean that when demand recovers, the lack of new productive capacity caused by the reduced investment would lead to the oil price overshooting upwards.
This would then have the effect of depressing GDP (gross domestic product), so leading to a sort of dead cat bounce in the economy with demand tailing off again. What this tells me is that, while investment may be less than expected had there been no credit-crunch problem, it is still important that at least some investment does actually take place.
Even at $100, the oil price is high enough to generate the cash flow to enable a significant amount of investment. But then the question becomes whether that price can be maintained if some economies go into recession.
If demand fell a lot further, then it is possible the oil price could fall quite dramatically, to perhaps even less than $50. This would be truly a doomsday scenario, particularly for very mature basins such as the North Sea. It would also kill off any prospect of deepwater or Arctic exploration unless the costs were underpinned by the relevant governments.
That’s unlikely to happen unless the oil companies involved are already state-owned and that the governments concerned have a strategic and long-term view of the industry.
And the UK Government’s answer to all this is what exactly?
Well according to Gordon Brown’s speech at the Labour Party Conference, which I think was written for him by his friend and children’s author J.K. Rowling, he wants to “end the dictatorship of oil and to avert catastrophic climate change”, and create “a transformation in our use of energy” with “new nuclear power, an unprecedented increase in renewables and investment in clean coal”.
He also said he wants “British companies and British workers to seize the opportunity and lead the world in the transformation to a low-carbon economy”, and he believes he can “create in modern green manufacturing and service one million new jobs”.
See what I mean about the J.K. Rowling input? This is pure fantasy.
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