Sun, Aug 05, 2007 - Page 9 News List

Oil gush will be hard to cap

Producers of crude oil are struggling to keep up with demand after reduced spending on infrastructure left rigs, tankers and geologists in short supply

By Nils Pratley  /  The Guardian, London

Another day, another record oil price, even if it didn't last long. This time nobody is surprised. The tone was set a few weeks ago when the International Energy Agency (IEA) warned of a supply "crunch" in five years' time and said demand for oil would grow at 2.2 percent a year, not 2 percent as previously thought, as India and China consume more.

Financial speculators enjoyed that assessment and increased their bets that the price would go higher. They were pushing at an open door. Crude oil stocks in the US have fallen, as if to demonstrate again that US consumers can't be separated from their cars even when their homes are plunging in value and pump prices are rising.

Meanwhile, the US hurricane season approaches, bringing a threat to production in the Gulf of Mexico; that's usually enough for a dollar or two on a barrel. Throw in a weak US dollar, the currency used to price oil, and the ingredients were there for a record price.

Behind it all, we are a witnessing a simple struggle by the oil majors and the OPEC cartel to keep up with demand. Producing oil is an exercise in heavy engineering, requiring huge infrastructure investment.

During the 1990s, when the oil price went as low as US$10 a barrel, spending was cut to the bone. The result is that everything -- rigs, tankers, geologists -- is still in short supply because this is an industry that thinks in terms of decades. On the demand side, the world has just enjoyed its strongest period of economic growth in decades, led by energy-hungry China.

Does it mean prices could go much higher? Not necessarily, because at some point sky-high prices will affect demand. But guessing where that point lies is a mug's game. The pundits with the best recent record are those at Goldman Sachs, who were the first to use the phrase "super spike." Their most recent forecast was that US$95 a barrel could be seen this winter; it was widely ridiculed at the time but suddenly looks plausible.


This is what we want to see: Some serious directors dipping into their back pockets and buying shares. HBOS Plc chairman Lord Dennis Stevenson bought ?500,000 (US$1 million) worth of the bank's stock on Wednesday, while Peter Cummings, the head of the corporate bank, forked out ?100,000.

Chief executive Andy Hornby was excused the whip-round, but only because he spent ?250,000 a few months ago on HBOS shares.


The trio would never put it this way, but their message to HBOS doubters in the City of London was clear: You may think our profits will fall over at the first hint of trouble in the mortgage market, but we don't; we're a diverse bank these days and we haven't made dumb loans.

The more usual way to signal confidence is to bump up shareholders' dividends, and HBOS did that too. The interim payment was lifted 23 percent and, again, the message was unmistakeable: HBOS is saying its earnings are of such quality that a higher level of dividends can be supported permanently.

It means that if, like Stevenson and Cummings, you were buying HBOS at ?9.27 on Wednesday, you can expect to collect 5.3 percent in income over the next year. That's not much less than you would get from a cash individual savings account, so why, if the shares are as cheap as the directors imply, did the price fall almost 3 percent on Wednesday?

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