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Falling Oil Prices Fuel Hopes for Consumers...

Posted on: Monday, 20 February 2006, 12:00 CST

By Guy Dixon

WITH Shell and BP pumping record profits and homeowners facing sharp increases in their heating bills, last week's news that crude oil prices have slipped below dollars 60 a barrel could prove to be the start of something significant for corporates and consumers alike.

The price of oil slipped to about dollars 58 a barrel at one point last week as US domestic energy supplies rose.

Prices peaked at dollars 70 a barrel in August on the back of surging demand from the US, China and India and amid geopolitical uncertainty in the Middle East, but have been falling since the beginning of this month.

Last Wednesday, March crude in New York fell to a low of dollars 58.55 a barrel - its weakest intraday level since December 27 - after Opec warned of weakening demand and the US government confirmed what many in the industry already suspected: US domestic supplies have increased.

At the close of play in London on Wednesday, Brent crude stood at dollars 60.05 and slipped to dollars 59.60 on Thursday before rallying to end the week at dollars 61.10.

In New York, prices also rallied to end the week at dollars 59.50, but nonetheless last week's decline prompted some in the industry to wonder whether prices may fall further and whether that may ease pressure on energy costs to industry.

Alexandre Kervinio at SG Commodities believes they will. "Fundamentals right now are bearish," he said. "The trend is definitely to be lower, at least going into the second quarter."

Jeff Coray, head of KPMG's European oil and gas mergers and acquisitions team, also believes prices may fall further but added: "I don't see it going below dollars 50 a barrel in the short term."

Others warn that prices could easily go higher, particularly because of trouble in Nigeria, where there have been a number of attacks on oil workers in recent months, and in Iran, which is attracting the scorn of the international community because of its nuclear programme.

One analyst said: "I'm surprised that we are at current levels, because the geopolitical uncertainties haven't changed much since oil was at about dollars 68- dollars 69 in late January."

Damien Cox, analyst at John Hall Associates, said: "Over the long term prices will remain firm. I don't expect prices to move much from dollars 60 to dollars 65."

Coray argues that current oil prices are not having a detrimental effect on the British economy. "We are in an environment where the price is healthy enough, even after last week's movement, for increased investment to be made. The economy is still growing, and even at dollars 60 plus a barrel, it hasn't really dampened demand. Everyone is still spending money."

But a fall in prices would be welcomed by high energy users and by consumers, who are seeing high prices at the petrol pumps and in the cost of heating their homes, combined with the rising price of gas.

Despite the recent falls, crude oil remains well above the dollars 32 a barrel seen at the start of 2004, but a further decline in the price would increase pressure on Chancellor Gordon Brown to reconsider his decision to double corporation tax on North Sea producers from 10 per cent to 20 per cent to raise GBP 2bn a year. The industry was braced for the tax rise after hurricanes Katrina and Rita sent crude prices soaring and Brown's planned raid on oil intensified in the autumn when oil firms reported much higher profits. He will argue that recent record profits from Shell and BP justify his tax hike.

But falling prices combined with the new tax are expected to hinder investment in the North Sea by companies already having to work harder to recover oil as fields mature.

Speaking last month, Lord Browne, chief executive of BP, said: "If there was no justification for a windfall tax 12 months ago when prices were just over dollars 30 a barrel then there would clearly be no justification for extra taxation if prices fell back to that level."

Shell chief executive Jeroen van der Veer admits "concerns" about the tax and last month called on the government to commit to lowering taxes when oil prices fell. Shell said the tax had contributed to its decision to cut its future North Sea drilling programme by a third.

Oil industry trade body the United Kingdom Offshore Operators Association says the introduction of the tax contributes to a perception that "some of our members no longer look at the UK as a stable fiscal environment to invest".

A spokesperson said: "If oil prices come down then the tax would need to be reversed. We have no indication that [reversing the tax] is something the Chancellor might consider, but we will continue to press for a fiscal regime which is appropriate for the North Sea."

KPMG's Coray is not hopeful. "It's my understanding that it was done without much consultation and therefore the industry has been reeling a bit. If the price comes down it will have an impact on the North Sea and he would have to rethink [the tax]. In the short- term, I'm not convinced - it would be a massive U-turn."

Source: Scotland on Sunday

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