Comment: Rudderless oil markets more of a worry

Autonomous driving is forecast by 2023. Picture: Contributed

Each week he would arrive at the office in a stunning “high end” motor. Dealerships would loan him the most prestigious cars for trial: Porsche, Lamborghini, Jaguar, Mercedes-Benz – Jim was the vroom-vroom virtuoso of them all.

But surely, I insisted, the high price of petrol – back then – would kill demand for these high-throttle beasts. “What’s the miles per gallon on that one?” I would ask amid his cheerful chirruping. He gave me a look as if this was the dumbest question ever. With a world-weary smile he patted my head. “What mileage would you like it to be?”

With the oil price collapsing close to $43 a barrel last week and pushing prices at the pump down towards £1 a litre, Jim must now be in top gear mode. But a tiny cloud, no bigger than a dashboard polishing cloth, is growing on the horizon. Who would want to spend tens of thousands of pounds on a piece of redundant tin?

Enter the era of the automated driverless car, which figured prominently in a talk in Edinburgh’s venerable New Club last week by the celebrated finance guru, Jim Mellon.

Why would we bother to own a car in a world where the majority are self-driving electronic models? Would most of us not prefer to pay a monthly subscription to call up an on-demand taxi service as and when? As Money Week’s John Stepek points out: no expensive repairs, no depreciation to worry about, no sky-rocketing insurance premiums or the constant fear of bumps and scratches.

Driverless cars are already on the road in America. And the future is barrelling down the highway quicker than we think. Mark Fields, chief executive of Ford, predicts fully autonomous cars by 2020. Tesla expects true autonomous driving – “get in the car, go to sleep and wake up at your destination” – by 2023.

A science fiction vista it may seem. But robotics and digital technology are set to alter profoundly the way we live. Ten years ago most of the denizens of the New Club would not recognise wi-fi, still less know how to work a mobile phone. Today they would not be without their iPhones and would be bereft if they could not dial up a taxi on their mobile app. The driverless car is just the next big thing in smart devices.

It spells massive change ahead for petrol-driven vehicles, conventional energy – and the outlook for oil. And it may see some of the big oil giants investing heavily in alternative fuel sources – where they are not already doing so.

The immediate crisis, of course, is the prospect of a fall in demand for natural resource commodities and oil, driven by the slowdown in China’s economy.

Deepening scepticism over government figures showing a slowdown from the 10 per cent GDP growth rate to just over 7 per cent caused serious tremors across global financial markets as the Shanghai bubble spectacularly burst. Independent analysts believe the country’s growth rate may be as low as 3 per cent.

An apprehensive calm looked to have returned across markets as the weekend approached. Is the worst of the sell-off over? Or might there be worse to come?

Key pointers on China’s economy will come this week with Purchasing Managers Indices due on Tuesday. And further official intervention may be attempted to calm growing domestic criticism of the government’s handling of the crisis.

Helping sentiment on oil are revised figures showing the US economy grew by far more than had been thought between April and June. These caused the oil price to rally strongly towards the end of last week, back above $47 a barrel, but still well below break-even levels for much of the North Sea unless companies can sharply curtail costs. It is of little comfort that this pressure is being felt worldwide. Financial information group Bloomberg calculates that profit margins for the MSCI World Energy Sector Index companies are at their lowest since at least 1995.

North Sea oil veteran Sir Ian Wood warns that oil firms are facing some of their toughest times in the wake of the latest price fall. He said crude prices below $50 a barrel were unsustainable. “There must be some clever thinking to incentivise investment. Otherwise we will not be in a position to take advantage of the upturn.”

All this leaves the onshore economy to do the heavy lifting. But at least we have entered this turbulence with some momentum. The second estimate of UK GDP out last Friday saw growth in the April-June period unrevised at 0.7 per cent quarter-on-quarter. Year-on-year growth is running at 2.6 per cent.

Early estimates of the expenditure contribution show a solid expansion of domestic demand. Household consumption grew by 0.7 per cent on the quarter – the 16th successive quarter of growth. Fixed investment grew by just under 1 per cent on the quarter, with business investment posting healthy growth of 2.9 per cent quarter-on-quarter.

With rising real incomes, continued improvements in credit conditions and confidence measures at historic highs, UK firms and households appear to have shrugged off any worries emanating from the Greece crisis.

Now a China slowdown is hitting expectations. In the front line would be UK exports. Sales to China accounted for 4.9 per cent of total UK goods exports in the second quarter. However, China’s importance to UK GDP as a whole is still fairly small. In value terms, goods exports to China in Q2 amounted to £3.2 billion or only around 0.7 per cent of GDP. But as Oxford Economics points out, beyond exports, there could also be broader repercussions, with consumer and business confidence hit and UK firms’ overseas earnings, particularly from Asia, suffering.

However, set against that is lower inflation and less pressure on the Monetary Policy Committee to hike interest rates, with a rise now thought likely to be pushed back from February to May of next year.

Given the febrile state of markets, we will have enough to occupy attention over the next few months. Driverless cars, profound though they will be in implication, are still “tomorrow’s problem”. «