BP’s chief economist Spencer Dale has said there are “no sacred cows” in a crisis.
The financial expert, who spent 25 years with the Bank of England, joined the firm a year ago.
In an interview for the company’s publication, he said enduring the 2008 financial crash had taught him to have courage in his convictions.
“In those environments, there can be no sacred cows,” he said.
“You have to be practical, bold and have the courage of your convictions. We achieved a lot and I am pretty proud of that, but there are things that I wish we could have done differently. I think quantitative easing worked in terms of the macro economy, but small businesses were hit very hard, as were savers and certain pension-holders.”
BP coining the phrase “ lower for longer” was motivated by the underlying weak oil price factors, according to Dale.
He said: “If you consider the two most recent big drops – 2008/2009 and 1998 – both of those were driven by economic recessions, the global recession in 2008 and the Asian crisis in 1998. So, we saw big falls in demand. Those tend to correct themselves relatively quickly.
“In contrast, the price weakness this time was caused by strong growth in supply, initially as a result of very strong growth in US shale. Normally, world demand for oil grows by about 0.8 million barrels a day per year, but at the end of last year US shale, on its own, grew by 1.6 million barrels a day. Last year, we saw a combination of supply increments from Iraq and Saudi Arabia that added a further 1.5 million barrels a day.
“What we know from history is that the oil market takes an awful lot longer to adjust to supply shocks than it does to cyclical demand shocks.”
The chief economist said a responsive US market had created “new economics of oil” and in turn thrown down the gauntlet to conventional practices.
“I think the big message is that shale is changing things. US shale accounts for less than 5% of the market, so we should not think it is going to dominate everything, but it is enough when thinking about how markets respond to disturbances,” he said.
“It acts like a shock absorber.
“The second thing is that conventional oil is dominated by big oil companies with large balance sheets that are not very sensitive to banking crises. US shale, though, is made up of 400-500 small producers, many of them with negative cash flow, so they have to keep borrowing to invest. What we observed in the financial crisis is that banking shocks amplify volatility. Up until now, the supply side of the oil market has been fairly insulated from that.
“Third, in the past, conventional oil has tended to mean big engineering projects, each one slightly different from the last. Shale is more like manufacturing. You use the same rig, same location, drilling over and over and over again and in doing so, your costs come down, efficiency and productivity improves, and so shale has thrown down the gauntlet to conventional oil: can you start doing greater standardisation? “
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