Europe South Asia Asia Pacific Americas Middle East Africa BBC Homepage World Service Education



Front Page

World

UK

UK Politics

Business

Sci/Tech

Health

Education

Sport

Entertainment

Talking Point

In Depth

On Air

Archive
Feedback
Low Graphics
Help

Thursday, April 1, 1999 Published at 16:57 GMT 17:57 UK


Business: The Economy

Lubricating the oil industry



BP Amoco's surge through the rankings of its industry to become the world's second largest oil company is symptomatic of a number of trends, say the experts.

Big has again become beautiful.

In recent months the oil company mergers have come as a response to the sinking price of a barrel of crude oil.


[ image: BP: Its Arco deal hinges on oil staying above $10 a barrel]
BP: Its Arco deal hinges on oil staying above $10 a barrel
Shrinking margins have meant businesses either merging or buying up one another in order to drive down costs, improve market share and gain benefits from economies of scale.

But those who monitor the developments in oil say the days of this energy source being as cheap as it has been in recent months has probably past.

From now on oil is likely to be more expensive.

Analysts say the reasons behind this include:

  • Opec, the oil producer's club, cutting production quotas in the hope of pushing up prices for a barrel of crude oil.
  • The improved unity of the Opec group which in recent years has been unable to maintain discipline among its members who have regularly broken rank and increased oil output.
  • Production costs are set to rise more steeply as reserves become more and more inaccessible.

Slow economic growth

The global demand for oil is likely to be constrained by the worldwide economic slowdown, especially in Asia.

Already, in 1999, demand has only been marginally greater than last year's exceptionally low level.

Nevertheless, oil prices have picked up from the recent low of $10 a barrel.

The barrel price currently stands at around $14 and although some gloom merchants are predicting prices will rise steeply as oil reserves begin to run out, most analysts are less apocalyptic in their forecasts.

According to NatWest senior research manager Peter Gutmann the cost of a barrel of oil is unlikely to exceed $20 over the next five years.

He argues new sites are being discovered so that exploitable reserves continue to increase.

"That has been the history of the past 30 years. People often pick a date about 5 or 10 years ahead when they say reserves will begin to run out but it hasn't happened yet," said Mr Gutmann.

Unrenewable resource

The economics director of the Economist Intelligence Unit, Gerard Walsh, said his forecast was based on Opec having a significant role to play in the future.

He reckons reserves in the US and the North Sea may well have peaked in terms of production of barrels each day.

Even so, he maintains the price of a barrel of oil will only be around $17 - $18 by 2003.

"Our initial thoughts are the era of cheap oil has come to an end and the demand for oil is going to be weakened by slow economic growth."

But if Opec loses its discipline it could all be very different and the prices could unravel once again.





Advanced options | Search tips




Back to top | BBC News Home | BBC Homepage | ©


The Economy Contents


Relevant Stories

31 Mar 99 | The Company File
Oil mega-merger





Internet Links


BP Amoco

Arco


The BBC is not responsible for the content of external internet sites.




In this section

Inquiry into energy provider loyalty

Brown considers IMF job

Chinese imports boost US trade gap

No longer Liffe as we know it

The growing threat of internet fraud

House passes US budget

Online share dealing triples

Rate fears as sales soar

Brown's bulging war-chest

Oil reaches nine-year high

UK unemployment falls again

Trade talks deadlocked

US inflation still subdued

Insolvent firms to get breathing space

Bank considered bigger rate rise

UK pay rising 'too fast'

Utilities face tough regulation

CBI's new chief named

US stocks hit highs after rate rise

US Fed raises rates

UK inflation creeps up

Row over the national shopping basket

Military airspace to be cut

TUC warns against following US

World growth accelerates

Union merger put in doubt

Japan's tentative economic recovery

EU fraud costs millions

CBI choice 'could wreck industrial relations'

WTO hails China deal

US business eyes Chinese market

Red tape task force

Websites and widgets

Guru predicts web surge

Malaysia's economy: The Sinatra Principle

Shell secures Iranian oil deal

Irish boom draws the Welsh

China deal to boost economy

US dream scenario continues

Japan's billion dollar spending spree