Feature9 – PriceOfOil
Over dinner with John Duffield in April, we got talking about the oil price. The New Star founder, hardly a meek conformist, was persuaded by the consensus view. Brent crude, which was then at $110 a barrel, was going higher and staying higher, he argued. I was less convinced. What odds would he give me that at some point in the next 12 months crude would fall below $30 a barrel?
I wanted long odds, naturally. A collapse to such a low level was almost unthinkable. The world would have to slip into some kind of economic catatonia to bring crude back to those levels. Eventually we settled on 25-1. Over the starter, I handed over my tenner, not expecting to see it ever again, but reckoning £250 would be a spectacular coup if it could be landed.
My chances looked even slimmer in the months that followed. The price soared, hitting $146 in July. All the talk then was of the price surging on to $200 and beyond. The days of cheap energy were permanently over, almost everyone agreed.
But oil’s reversal since then has been just as spectacular. By this week it was down to less than $70 a barrel and the decision yesterday by Opec to proclaim production cuts of 1.5 million barrels a day failed to stem the slide. It dipped another $3 to $63.
My bet was based, not on any profound insight into the oil market, but on two thoughts. First, the oil price is fiendishly difficult to forecast. Solemn predictions of the past have proved risibly inaccurate. Ten years ago not a single pundit could be found to forecast oil above $10. The Economist famously predicted $5 a barrel.
Secondly, cartels almost always ultimately fail and they fail miserably in miserable times. Opec, for all its perceived power, is permanently plagued by cheating. Member countries want others to restrict production while themselves turning on the tap.
The last time Opec decided on a dramatic production cut was in April 1998, when cuts of 1.8 million barrels a day were proudly announced. From that point, the crude price continued to fall for another 14 months, slumping by a further 32 per cent.
Two forces are pushing oil lower. One is the unwinding of huge speculative positions. The other is the spreading of the economic slowdown to Asia. The price fall is welcome, curbing inflation and making it easier for central banks to bring forward meaty interest rate cuts.
With six months to go, I still expect to lose my bet. But it no longer looks such a ridiculous outside chance.
(by patrick hosking, The Times, 25 October 2008)
