Commentary, 7/8 2005

Published Aug 22, 2005
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All in the Numbers
Earlier this month, the word was that the largest on-line betting site will begin letting gamblers wager on whether gasoline prices in the U.S. will reach $3 a gallon in New York or Los Angeles by the end of the year.

Sounds amusing – a nice Internet diversion when the boss isn’t looking. But isn’t this what the markets do for a living? Brokers look a the day’s events to determine whether to buy or sell – gambling on how what’s happening today will play out in the future. Perhaps not as simple as the “either-or” wager, but the results are the same – if someone wins, then someone else loses. When is comes to oil, no matter who wins, we all – including the winners – lose just a little.

We all pay the price of expensive oil, whether it’s due to increasing demand or inadequate production or any of a number of social or political catalysts. In the end, the cost does get spread quite thin, and some analysts tell us that right now we don’t feel the pinch because the world economy is doing relatively well. So at least for now, we’re doing OK.

U.S. President, George W. Bush has signed the energy bill passed by Congress after a four-year battle, yet he admitted that the bill offered no short-term relief from rising gasoline costs. To those of us on this side of the Atlantic – as well as others around the world – the anxiety over gasoline prices in the U.S. seems a little odd, considering that in general, we pay close to four times more at the pump. But no matter where you live in the world, there’s one sure bet – the price of oil is on the rise, so we’re all going go pay more in the end.

In real terms, adjusting for inflation, oil is still below the average price of $80 a barrel (in 2005 dollars) where it stood during the year after the Iranian revolution in 1979, which was the second oil-price hit of that decade. But that doesn’t mean that there isn’t a great deal of money being made. So how will the price of oil and all this cash-in-hand influence the way the industry does business? Yes, even the industry must pay the price for more expensive energy, yet there will undoubtedly be changes across the industry as assets accrue. Some analysts see a new wave of mergers and acquisitions on the horizon.

In our own backyard, Kerr-McGee of the U.S. has agreed to sell its British North Sea oil and gas interests to Denmark’s A.P. Moeller-Mærsk and to UK utility Centrica Plc for a total of around $3.5 billion. For Mærsk, the deal means interests in 10 oil fields with a current production of some, 60,000 barrels per day, a number of smaller oil and gas discoveries as well as an exploration portfolio for $2.95 billion in cash on a debt-free basis, which would have a modest positive effect on the Mærsk 2005 result. Now, rumours are circulating that Mærsk is in the market for drilling rigs, specifically, Norwegian drilling rigs. So it seems that the wheeling and dealing may have already begun.

What will the next step be? Mega-mergers? Will the independents start to look appetising to the giants, beginning a take-over feeding frenzy? It’s another sure bet that we’ll be seeing some changes in the short as well as long term. But who’s willing to gamble on just what those changes will be?

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