London Sees Oil Prices on the Rise
My latest trip to London may have centered on the briefings I gave on Iranian oil sanctions, but I also did a number of media appearances.
As I have mentioned before, questions from European interviewers are generally more knowledgeable and to the point than in the states. This may be because places like London are closer to the events directly affecting the price of oil.
Or it may simply be a result of recent history.
Each of the major events that have determined oil price fluctuations in the past two years (Egyptian unrest, Libyan civil war, bank credit squeeze, euro valuation, Iranian oil embargo) have either been of European origin or have affected Brent prices set in London almost immediately.
The better questions asked here may simply be a function of having less time to deal with matters in the abstract. Events have direct consequences here, and the market has less leverage to overlook them.
So it was hardly unexpected that I would be asked explicit questions requiring focused answers.
However, there was a surprising element. Nobody – be he/she a commentator, journalist, analyst, or expert – expected a fall in oil prices. The entire market environment in Europe is looking in the other direction.
The “high point” in an American interview is usually when somebody asks me where I think the price of oil or gasoline is going. In London, the matter also came up. However, my predictions of $130 a barrel for Brent and $115 for WTI (West Texas Intermediate, the benchmark crude traded on the NYMEX) by the end of 2012 were considered on the low side.
My further suggestion of $150 for Brent and $130 for WTI by the end of 2013 have caused some disagreement in the states, but are par for the course averages for what people are saying over here.
The overwhelming consensus in Europe is that oil will rise, absent exogenous economic or financial problems. In other words, the price can go down, but such a move would be a result of another bout with credit crises, intra bank problems, or currency weakening. In such situations, the lowering of oil prices has nothing to do with oil, or its supply/demand balance, or its trade. Rather, economic constriction results in concerns over short and medium-term demand and those translate into a lower price.
Left on its own, the consensus over here is simple. Oil goes up.
Concerns Grow in Europe
Now, unlike in the U.S., the conversation does not then immediately move to prices at the pump. Gasoline is less of an issue for the simple reason that a combination of heavy taxation, lowered usage and a far better mass transit system has made driving more of a luxury than in the U.S.
Paying the equivalent of $7 a gallon tends to have that effect.
Rather here, the question is the price result for other oil products, especially diesel. In Europe more diesel is consumed daily than in the U.S., and it costs less than gasoline (the opposite of what happens in the American market). The impact of diesel prices has a more pronounced effect on industrial usage. And that means pressure on jobs.
There is also the concern over what the higher oil prices means for heating oil as winter approaches. Diesel is once again a good surrogate, since diesel and low sulfur content heating oil are produced from the same refinery cut.
That makes their pricing similar.
The U.K. is now in yet another unemployment cycle. You can see it everywhere as a combination of bottom-line concerns in both the private and public sectors are prompting cutbacks and “redundancies.”
There are fewer employees in shops and restaurants. But there are also fewer employed in public services. For example, it is not unusual to have closed ticket windows at tube (subway) stations with signs indicating the reason is reduced employee availability.
That the threats of strikes are once again making their presence felt is yet another indication that the belt-tightening of the current Conservative-led coalition government is beginning to trigger a pushback.
Rising oil prices over here, therefore, are not perceived as a threat to the family SUV, but an attack on the breadwinner’s ability to work. The country has for some time experienced a division between a more prosperous southeast (London and environs) and a depressed Midlands and north.
In March, I wrote from Scotland and talked about the 60% plus pockets of unemployment there. Well, the situation is deteriorating in the north as I write this. But now the problems are moving into the more developed areas of the island.
Rising oil prices will hardly help.
There is nothing of consequence that Whitehall (the London street snaking between Trafalgar Square and Westminster that lends its name to the collective U.K. political administration) can do about this.
The same can largely be said for the White House and Capitol Hill.
Lessons For U.S. Oil Production
For years, the oil coming from the North Sea had been an advantage for the U.K., providing the prospect of a large domestic source to buttress against the volatility of an international oil market. That volume is ending as North Sea crude extractions decline and new offshore fields become smaller and more expensive to develop.
That means the British economy is less insulated from what is happening elsewhere and more vulnerable to each geopolitical ripple and its effect on oil. And despite not being a member of the Eurozone, English banks are now feeling the European credit crisis. The overwhelming view expects a downgrade in the U.K. credit rating soon.
There are a number of economic differences contrasting one side of the big pond from the other. The U.S. market is far stronger and more resilient. It also has the prospect of its own domestic oil source – rising unconventional production (from shale, tight and heavy oil, bitumen, along with synthetic crude from Canadian oil sands). That has led to a renewed (and misguided) complacency that what is happening over here in London is not going to be occurring at home.
But when it comes to the impact of rising oil prices on the broader market, the U.S. is advised to watch closely what is playing out in the U.K. This remains an integrated global oil market, despite the emergence of domestic sources.
As one knowledgeable colleague over here put it last evening – “The North Sea could not insulate us Brits; oil from shale will not completely integrate you Yanks either.”
He then – in traditional English fashion – took the colonial (me) to the cleaners at snooker.
Still can’t figure out where they hid the pockets.