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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.

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