Arab Spring just the latest cause of oil price see–saw

RISK. It’s hard to live a quiet life with it, but you don’t make much money without it. As analysts ponder how soon Libyan oil will come back onto the world market, political instability risk is just one factor that drives dizzying volatility in international crude prices.

As the battle rages for supremacy in Tripoli, Libya sits on the largest oil reserves in Africa – though it only produces 2 per cent of global output. The uprising which seems to have toppled Colonel Muammar al-Gaddafi’s regime has shut down Libyan oil exports since February, which prompted Saudi Arabia to produce more oil and developed countries to release oil from strategic reserves to help settle the market.

So it seems that, if Libyan oil comes back on the market, prices will come down. Except the other factor in oil price volatility is also spare capacity – the buffer between demand and production that can absorb shocks, such as the complete shutdown of a producer due to the ousting of a tyrant. But when spare capacity gets too thin, buyers and speculators get nervous about the risk of shortages – thus driving up prices.

Both of these factors are reflected in the crude price see-saw of recent days and months, as the market absorbs each announcement of a coup in Libya and each counter-announcement that loyalists are staging a fightback, while worries about how much spare capacity Saudi Arabia actually has also weigh in.

So the lesson in supply and demand ends. But the sooner-versus-later debate over whether Libya’s small (in global terms) oil production comes back underlines the risk factors that make up the day-to-day decisions of all companies in the sector.

Take Wood Group. When the Aberdeen-based firm won a seven-year, £500 million deal to provide engineering and maintenance services for a major project in the south of Oman last December, its share price touched record highs. But within days of the firm’s announcement, the beginnings of the Arab Spring kicked off in Tunisia and spread through Egypt, with Oman’s own “day of rage” following shortly after. Yesterday, while Wood unveiled a 49 per cent jump in half-year profits, it also revealed that delays in Oman were creating a drag on profitability in its PSN division.

Although the country’s upheavals were mild compared to Egypt or Libya, Wood Group chief executive Allister Langlands admitted the firm had initially met problems recruiting to the area. And really, can you blame any one who decided come January he might not take up the offer of employment in the Middle East? Wood Group said the issue was likely to prove a blip and won’t affect the firm’s second half.

The Omani deal was actually signed with a Lebanese firm, Consolidated Contractors Company – the largest engineering and construction firm in the Middle East. This is the same firm Cairn Energy revealed was a member of its new consortium as it prepares to bid for licences offshore Lebanon.

The potential for oil and gas there is huge, as recent major discoveries in nearby Israel have indicated. But the region, tucked firmly in the midst of the hostilities between Cyprus and Turkey, and those of Israel and Syria, means even if Lebanon is enjoying a tenuous peace, the outlook is still risky. But potentially lucrative as a result.

Industrial firms have work ahead to balance boards

WOOD Group is also one of the 15 FTSE 100 firms in the UK to have no women on its board six months after Lord Davies launched his report on diversity in the boardroom. And while a survey of Scottish businesswomen by law firm Tods Murray showed only 4 per cent believed that the report will make a difference, Wood Group aims to remedy its female-free status – in time.

For heavy industrial firms like Wood Group and Aggreko, another female-free zone, it could be argued there are simply fewer women in senior roles to recruit from. But boss Allister Langlands noted that engineering graduates are increasingly balanced between men and women.

He said: “With lots of great women coming into the business the challenge for us and everyone else in the industry is to sustain their careers and hopefully they can come through to the top in due course.”