At the end of the Davos Economic Forum last week, the BBC economics editor, Kamal Ahmed, asked some of the leading oil experts to forecast what the price would be this time next year.
“Mid-40s,” said Bob Dudley, chief executive of BP, confidently. “$20 a barrel,” said another chairman. “Mid-30s,” opined a third, while another reckoned it would be about where it is now – in the $30 range. Then a growly voice spoiled the party: “There’s no reason it shouldn’t drop below $10 and maybe even $5.”
That’s an extraordinary range. At the lowest end, it would mean a collapse of over 96 per cent from the peak, unheard of territory for a major commodity, even in the 1930s. And it would spell disaster for a world economy still trying to recover from the last crisis.
The meeting had already been dominated by one of the gloomiest weeks in the markets – only partially relieved by a recovery on Friday after the European Central Bank indicated it would supply an extra stimulus – since 2008, when they went into meltdown.
The unknown consequences of what is happening in China, and the growing possibility of Britain’s exit (Brexit) from the European Union, unnerved the 2,500 powerful businessmen, politicians and commentators who had gathered at the resort, but oil was probably the most persistent talking point. Just to emphasise its impact, the price hit $27 per barrel during the conference, its lowest level since 2003, sending another shiver through markets worldwide.
The oil analyst who attracted a lot of attention at Davos was the CNN business journalist John Defterios, whose opinion holds a lot of weight in these circles. Based in Abu Dhabi, Mr Defterios has been accurately calling the price of oil for some years and he chaired an influential panel called the New Energy Equation, which included the chairman of Saudi Aramco, Nigeria’s energy minister and representatives from Azerbaijan and Russia. There was some healthy disagreement among the panellists on where the price was going, but the consensus view was that it is currently well into oversold territory and that the marginal price has to be above $30 for the stability of the world’s economy. The supply issue is not going away in a hurry. The world is producing 1.5 million barrels per day more than it is consuming, and that will get worse when Iran cranks up its production.
“The market underestimates Iran’s capabilities,” said Mr Defterios, adding that on a recent visit to the country he had been told by the authorities that they could add another million barrels per day so the oversupply would be 2.5 million bpd. On the whole, however, his panellists were for oil somewhat higher than it is now.
Throughout the conference there was endless discussion about the global supply/demand situation, the Saudi strategy, splits in Opec and the price at which US shale oil, which is becoming the real swing producer, becomes uneconomic. “A good, efficient shale producer will survive,” predicted Mr Defterios, but half of them won’t because their costs are $50 to $60 a barrel. Saudi Arabia, by contrast, produces at $2 to $4 a barrel and Abu Dhabi is even lower, the lowest in the world. Middle Eastern producers, with running costs of between $2 and $10 a barrel, can keep going a long time at $30-barrel oil, particularly if they cut their budgets as Abu Dhabi has done. Before this crisis is done, Mr Defterios believes the Middle East will increase its share of world production from 35 per cent to more than 50 per cent.
Theoretically cheap oil should be good for the world’s economy, but not this time. The Economist, under the headline Who’s afraid of cheap oil?, concludes that maybe we all should be. “Cheaper fuel should stimulate economic growth,” it says. “The benefits to consuming nations typically outweigh the costs to producing ones.”
But so far in 2016 the 17 per cent lurch downwards in the oil price “has coincided with turmoil in global markets”. The magazine continues: “It is as if the markets are challenging long-held assumptions about the economic benefits of low energy prices.” The world, it concludes, “could yet be laid low by an oil monster on the prowl”.
No Davos meeting would be complete without a headline-grabbing contribution from George Soros, and this year he was in fine form. The veteran hedge fund manager is one of the true oracles of these annual meetings and when he speaks, the markets take notice. In what one commentator described as a “blood-curdling interview”, Mr Soros said he thought that the low oil price is having the reverse impact to the orthodox one, and far from accelerating an anaemic recovery, is actually dragging it back.
Mr Soros repeated his view that the world economy is in a similar situation to 2008, when it plunged into its worst post-war recession, with the difference that today the root cause is not American sub-prime mortgages but China. In Mr Soros’s considered view, a “hard landing” for the Chinese economy is “practically unavoidable” and, together with the oil price collapse, means a fresh bout of world deflation.
That is far too pessimistic for me – and for most of the 2,500 delegates. Mr Defterios and others believe oil may have bottomed during Davos. “I think you could see $50 by the end of the year,” he concluded. We can only hope he knows something Mr Soros doesn’t.
Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis