Bouncing Bob Dudley was on surprisingly good form last week. Putting Deepwater Horizon and that silly spat about his rewards for failure behind him, the BP CEO invited the analysts to raise their eyes to the sunlit uplands ahead. The company is back to doing what it likes best, prospecting for more oil.
This is an expensive occupation. For BP to be able to make enough money to sustain the dividend, it now says it needs an oil price above $60 – and the price today is a rather soggy $55. Last month BP’s own 2017 Energy Outlook argued that the industry faces a prolonged glut and subdued prices.
Its record here is, well, patchy, since the 2015 Outlook completely failed to see the collapse in the oil price which took place almost before the ink was dry. Nevertheless, it’s on firmer ground when looking at supply, and now argues that we already have enough discovered oil to last until 2050, even given rising consumption.
That may still not be pessimistic enough. Last week Myron Ebell, a recent adviser to Donald Trump, swept through town, signalling that his former boss is determined to make America self-sufficient in oil and gas. The combination of advancing fracking technology, falling costs and major new discoveries in the lower 48 states, spurred on by Trumpenomics, make this highly likely.
The consequences of an America self-sufficient in oil and a significant exporter of gas are profound. The creaking cartel of oil producing countries could withstand surging US output only if Saudi Arabia was prepared to take the strain to support the price. With the latest OPEC agreement looking rocky, the kingdom is already being forced into the role of swing producer, against its wishes. With a stuttering economy and the need to prepare its oil monopoly, Aramco, for a public offering, there are limits to the Saudis’ ability to cut back production.
BP’s survival, recognisably the same company despite a bill of $62bn for the Deepwater disaster, is a corporate wonder of the age. However, unless the oil price surprises on the upside, the survival of the company’s current dividend would be another one. This is why BP shares yield 7 per cent at today’s exchange rate. The market doesn’t quite believe.
The gold-coloured brick standard
Gold mining must rank as one of mankind’s more futile occupations. Nearly all the gold which is dug up so expensively is destined to be buried somewhere else, and if the metal’s trade body has its way, we shall soon learn how much of it is buried under the streets of London.
The London Bullion Market Association estimates that $26bn of bullion is traded every day in the City, but with most transactions directly between buyer and seller, it doesn’t really know. This is not at all modern, so the LBMA is pressing for transparency, at least as far as stocks of the stuff are concerned. The Bank of England alone is thought to be sitting on $150bn-worth.
Sadly, only a few bars belong to the UK taxpayer.The rest is a useful little earner from owners who have confidence that the BoE will look after it. So while ownership changes all the time, sometimes on paper, nowadays more often in pixels, the bullion slumbers peacefully in the vaults.
More than any other, the gold market is built on confidence. The Association thinks greater transparency will help build it further, attracting more business to London, and it could be right, although those buying as an insurance policy against armageddon would surely want actual metal. A paper certificate might not command the same respect in a global crisis.
Much of the world’s excavated gold is thought to be in Fort Knox, but nobody can be sure, since the US government will not allow the auditors in. There may be nothing more there than millions of gold-painted bricks inside a fancy security system.
Would it matter if Fort Knox turned out to be empty? In theory, its gold backs the greenback. In practice, there has been no connection since President Nixon broke the tie. Apart from wondering where it all went, would we, or the US taxpayer, be any worse off? These are deep waters, Watson…
This is my FT column from Saturday, inexplicably printed with the gold piece first.