Commentary, 1/2 2006

Published Feb 13, 2006
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$ 262 bbl !?!
Nelson Schwartz, a senior writer at Fortune, has reported from Davos, Switzerland, that one analyst, Bill Browder of Hermitage Capital has outlined six scenarios that could take oil up to $262 per barrel.

To come up with some likely scenarios in the event of an international crisis, Browder’s team performed a regression analysis, extrapolating the numbers from past oil shocks and then using them to calculate what might happen when the supply from an oil-producing country was cut off. Of the six different situations, the fall of the House of Saud, which may seem the most far-fetched, generates an outcome of $262 per barrel.

Other scenarios include major attacks on infrastructure by the insurgency in Iraq, culminating in $88 per barrel, and a civil war in Nigeria, leading to $98 per barrel. All of Browder’s scenarios result in reduction or cessation of production in areas that are the top producers. Likewise, the scenarios can be characterised as incidents marked by a sudden loss of stability within a region. The results are dramatic and, for the most part, immediate.

No one can predict the future, but with the recent history of oil prices and the seemingly growing unrest around the world, we cannot say with any certainty that one or more of the scenarios Browder analyses will not happen. The scenarios are extreme, but they are not outside the realm of possibility.

The focus of Browder’s analysis is on each worst-case scenario’s effect on the price of oil. But what of the regions from which the oil ceases to flow. A civil war in Nigeria hits the rest of us in our pocketbooks, but what of those who live and work in the region? Our inconvenience is really only minor when compared to the suffering in any region that depends on oil and gas industry income.

Closer to home, we’ve recently seen problems with the customer-supplier relationship in Russia and the Ukraine. Other nations that border on Russia are beginning to experience problems as this giant begins to flex its oil muscle. In the end, where will all this lead? Much of Europe depends on Russian energy, and many wonder what will happen next. This kind on uncertainty makes people and the markets nervous.

But we are the lucky ones. We are the ones who work in the peaceful stability of the North Sea. Right?

True – we can say that we do have a certain level of stability and certainty for the future. Although many of the world’s largest producing areas lie in unstable regions, we are among the regions that can claim a level of stability. And it’s stability that the industry needs to move forward. The price of oil changes hourly, but the pace of production can take decades.

Industry leaders must be able to make long-term plans, and subtle changes can lead to big problems. They certainly know, understand and compensate for the risks in, for example, a country like Nigeria. But when doing business in the North Sea, how much instability can be tolerated? When a new government comes into power here in Norway – which is a polar opposite to Nigeria – how much change can the industry absorb?

At what point does it become easier to deal with known evil rather than the perceived goodness?

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