Both literally and metaphorically, oil drives modern economies. It is so central to what we do that its price is the single biggest determinant of prosperity, yet despite the concerted efforts of economists everywhere, it has proved almost impossible to predict.
Last week the cost of a barrel of crude suddenly lurched down out by $5 out of its trading range. The move quite overwhelmed the cheerful comments from analysts responding to Royal Dutch Shell’s $7.25bn sale of its tar sands business in Canada. Partly thanks to the weak pound, Shell shares yield 7.2 per cent, a dividend that looks significantly safer after this deal.
Whether it is truly sustainable, or whether we holders should consider our investment as an annuity, with assets being sold to maintain the income, depends above all on the oil price. It’s fine, says the International Energy Agency, dismissing any talk of peak demand for oil. Indeed, the agency’s latest analysis forecasts that the cutbacks in exploration following the price crash from $100 point to a supply crunch in 2020.
Oh no, it’s not fine at all, says a detailed study from the Grantham Institute . The game is up for oil, with demand peaking that year, thanks to falling costs of solar and wind power. Even gas faces the prospect of little growth in demand.
Well, maybe.The oil price does look vulnerable, but more because of Trumpenomics’ policy aim of US self-sufficiency rather than through any lack of demand. We might conclude that Shell has seen the light in escaping the glue of Canada’s tar sands, a chronically marginal business, while mass adoption of electric cars is the future that never arrives. And as BP has shown with Macondo, there’s a deal of ruin in a big oil company.
All aboard the paper train
David Higgins has been updating us on his vision for HS2, that magnificent money-eating machine about to carve its way through the middle of England. He wants to see “everyday low prices” on the railway, along the lines of EasyJet or Ryanair. So, rather as you book that holiday trip to Alicante well in advance before the price goes up, you will book an exciting high-speed ride from London to Birmingham on a specific day months away.
Almost in the same breath Sir David, the chairman of the project, dreams of “making Crewe within commuting distance of London, Birmingham and Manchester.” This is about as likely as Birmingham becoming a tourist destination, and is typical of the muddled thinking that gave us HS2 in the first place.
Unlike, say, Heathrow’s third runway, this project appears to be unstoppable, despite the evidence that it is not worth doing. Even if it can be built for its budgeted £22bn, the Public Accounts Committee doubts whether the line is value for money. Since £1.4bn has already been spent and building is yet to begin, that budget looks like a fantasy figure.
Sir David tells us that rail fares will be published this year, another paper exercise that is rather easier than actual construction. The prices might allow us to work out how much of the capital cost is wasted. They are unlikely to show that commuting from Birmingham, let alone Crewe, is a viable option.
A Gilbertian drama
It’s unkind to suggest that 1000 jobs will go from Standard Aberdeen in order to save one, but to make financial sense of this merger, the first figure may not be too far from the eventual outcome. Fortunately for Scotland, most of the redundancies will be abroad, some as far away as London. Others, like Standard Life’s departing head of equities David Cumming, will have more time to listen or even appear on early morning radio.
The merged company aspires to be viewed the way the market rates Schroders, where the family control allows it to take a long view. Perhaps Standard Life’s 1.5m small shareholders, who have held since flotation, might provide a similar sheet anchor. In the meantime, the new company has to demonstrate that two chief executives are better than one, and why it needs to have over £600bn under management in order to make a decent living.