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Is the oil industry really close to collapse?

Aberdeen on red alert as black gold fades to grey

North Sea rigFri 19 Dec: The fall in the oil price is in danger of spreading panic down Union Street. Aberdeen, home to the highest concentration of millionaires in Britain, is fearful that the industry which keeps it functioning is about to slam on the brakes.

It is not just the luxury car showrooms and swanky restaurants that expect to see a decline in business. The knock effect could be widespread. Already hotels are suffering from cancelled events and Christmas is suddenly looking not so jolly.

But is talk of a collapse a little overdone? To borrow a phrase used for another crisis-hit industry, oil is simply “too big to fail”.

It is not as if the oil price has always been above $100. The industry lives with the volatility and plans accordingly. In the late 1980s and early 1990s the price of a barrel slumped to $10 (the industry struggled but it didn’t collapse) and by the end of that decade production hit a peak. The price subsequently rocketed to $147 before falling rapidly to $35 and then stabilising in a range between $70 and $90 until early 2011.

The causes are rarely the same but are always related to world events: the supply shock in Libya which saw 1.5m bbl per day of top quality crude oil leave the market, and the explosion at Fukushima, which saw a dramatic switch from nuclear to carbon-fuelled energy.

Among the factors this time is slowing demand in the emerging markets and higher production in the US. There is suddenly a glut of oil.

This is also why the price is likely to right itself. The Opec nations have so far refused to cut supply for reasons I outlined in another commentary. Their own fiscal deficits make it a tougher call. However, they will be pressured to reduce output.

The UK government is also learning at long last that it cannot simply use the North Sea as a cash cow, plundering it for tax receipts. Chancellor George Osborne announced tax cuts in the Autumn Statement but he will be urged to go further, not just in reducing levies but simplifying the system.

Investment will slow down, some fields and projects mothballed and jobs will be lost, possibly tens of thousands.

But talk of a collapse is almost certainly overstated. Oil workers are used to seeing their pay rise and fall in relation to supply and demand. One Scottish recruitment agency boss says that cuts in contractor rates “is no bad thing” as they have been too high.

A low oil price may impact negatively on some but it also brings benefits. It cuts energy costs for other businesses, particularly those in transport and manufacturing. Motorists benefit from cheaper fuel and consumers in general gain as lower production and distribution costs work their way down to the price of goods and services in the shops.

The price is predicted to rise next year, bringing some relief to the industry. However, until it does there will be some battening down of the hatches and fewer Ferraris leaving the Aberdeen showrooms.

 

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