Comment: Mixture of oil and politics blows in our faces

By GEORGE KEREVAN
Published on 23/06/2012 00:00

QUESTION of the week: what is driving down the price of oil? Brent crude, the main European benchmark, fell more than 8 per cent this week, hovering around $89 per barrel. That’s down a significant 30 per cent from March, when it hit $128.

Yesterday, American West Texas crude was even lower than Brent, at circa $78, after suffering a 4 per cent drop on Thursday alone.

One obvious explanation is the marked slowdown in global manufacturing, which portends a fall in demand for oil and oil products. US factory output is still growing but at its lowest rate for nearly a year. Output in the eurozone has dropped for five months in succession.

Yet there is no evidence that global demand has fallen significantly. Chinese imports of crude are up, despite a slowing economy.

Another explanation is that prices were driven up earlier in the year by fears of Iran closing the Gulf. Thankfully, those fears have subsided. However, the price of crude is now well below what it was to start with.

Perhaps there is too much oil? The Opec cartel countries have been pumping around 1.6 million barrels per day (bpd) more than their official target. This is because Saudi Arabia is content to moderate prices to spite Iran and support economic growth.

That might change if prices continue to plummet. This is evidence that Opec is having second thoughts, despite assurances at its Vienna summit on 14 June that falling oil prices did not worry it. Western analysts who track tanker movements are pointing to a drop in shipments from the Gulf scheduled for July.

But for now, global oil demand and supply are not markedly out of kilter. Which suggests that the culprit behind falling oil prices is risk aversion in the commodities and futures markets, not changing fundamentals in the real economy. For this, blame America.

The US is enjoying an explosive growth in domestic shale gas production, which could add three million barrels of oil equivalent a day to output by 2035. That’s a 30 per cent increase. America’s Energy Information Agency (EIA) has begun to talk about the US becoming an oil exporter. No wonder investors are getting out of dear oil.

But wait a minute. America consumes around 19 million barrels of oil each day. Even with oil from shale, the EIA predicts domestic production will only be 6.7 million bpd by 2020. To get North American oil output up anymore you need to exploit highly expensive Canadian tar sands. Besides, over the next two decades, US oil consumption is bound to rise.

Talk of US oil exports is political hype from the EIA in an election year. My guess is that investors over-reacted to the Iran threat and forced crude prices too high. They are now over-reacting in the opposite direction, having gotten their fingers burned. We’ll probably settle at something between $80 and $100 per barrel.

Start the clock and see the planners move

FOR my sins, I sat on Edinburgh city council’s planning committee for a decade. Every week, we reviewed dozens of individual applications, from new housing estates to modest extensions to the family bungalow.

There was no correlation between the length of time taken to debate an application and its scale or importance. I remember several meetings were devoted largely to determining the colour of an outside staircase for a bank in Corstorphine. I also remember the retirement party for one director of planning, who used his farewell to say he was most proud of all the applications he’d blocked.

As a councillor, I was in charge of major projects such as Edinburgh Park. My usual rule of thumb was it took a decade to get a large construction project through planning. And an iron bottom.

So I am not quite as upset as the Federation of Small Businesses that the Scottish Government is putting up planning fees by more than 100 per cent – provided it results in councils improving the speed and efficiency with which applications are processed.

However, I have a better solution. Any application not adjudicated in reasonable time should receive automatic approval. Just watch planning committees decide between yellow or black.