BP Amoco chief economist: 1998 bucked industry trend

World energy developments in 1998 differed significantly from those of the last decade in some key ways.

Energy consumption growth was virtually flat, and oil prices were very weak, driven down by warm weather, Asia's economic crisis, and an abundance of oil and gas. This was the view presented by Peter Davies, chief economist of BP Amoco plc, at the launch of the BP Amoco Statistical Review of World Energy for 1999.

1998 remembered

"Nineteen ninety-eight," said Davies, "will be remembered as a year of crisis for the oil markets as oil prices hit 25-year lows. For the year, Brent crude averaged $13.11/bbl, one third ($6.19) lower than in 1997 and the lowest annual figure recorded since 1976, in nominal terms.

"(West Texas intermediate crude) averaged only $14.39/bbl, more than $6 lower than in 1997. Adjusted for inflation, the price in real terms was at its lowest level since the first oil price shock in 1973."

Davies said that last year's price behavior broke what had been a regular pattern since the sharp decline of 1986. Until last year, Brent had stayed at $15-21/bbl more than 80% of the time.

"Excursions outside this range only lasted for a maximum of 6 months," said Davies. "The Brent price fell decisively below $15/bbl in February 1998, a level that was not seen again until March 1999. This price behavior has thus been exceptional."

The U.S. was hit hardest by low prices, said Davies, with output declining 275,000 b/d, as marginal wells were shut in and drilling activity was cut back 40% during the year.

Worldwide oil consumption growth was only 0.1% in 1998 vs. the 2%/year trend that had been maintained for the preceding 10 years. Oil use last year amounted to 71.53 million b/d, said BP Amoco, while global production averaged 73.11 million b/d (Fig. 1 [45,715 bytes]).

Supply cuts

Davies cited the reduction in output by the Organization of Petroleum Exporting Countries and a number of non-OPEC producers (Fig. 2 [40,742 bytes]) as a major factor behind the recent price recovery, leading to a total of 4 million b/d of capacity being taken off the market.

"But with prices now around $16/bbl for Brent, has anything changed?" asked Davies. "It is apparent that we are still in a 'supply-push' world where cost-cutting and technological advances prevail.

"Asian oil consumption is now showing first signs of tentative recovery, but the economic recovery is not yet fully self-sustaining, and it remains vitally dependent on continued strong economic growth in the U.S. It is unlikely that oil demand will grow at quite the trend rates seen in the 1990s before the crash.

"On the supply side, OPEC will face continuing pressure from non-OPEC cost reduction and the build-up of Iraqi capacity, if and when substantial foreign investment is permitted. So, for the major oil producers of OPEC, the challenge of managing markets in a world of plenty will remain (Fig. 3 [51,865 bytes])."

Davies said that petroleum companies worldwide have cut back drilling and development projects to such a degree that non-OPEC production will decline significantly in 1999. However, there are signs of the first pick-up in U.S. drilling, he added (see story, p. 24).

If OPEC's cuts are held at their current level to yearend, and non-OPEC production is held in check, Davies predicts that global oil stocks will decline to their 1997 level. No major stock decline has been noted yet, but seasonal effects are blurring the picture at the moment.

Nevertheless, Davies said that, while crude oil prices are near the bottom of the $15-21/bbl range, petroleum companies are not expecting prices to return to this same price band but instead think that oil prices may settle into a new range-one at a lower level.

According to the BP Amoco review, natural gas also performed weakly in 1998, with consumption growth of 1.3% lagging the recent trend of 2.2%/ year growth.

The fall in gas use was dominated by a 3% cut in U.S. gas consumption because of unusually warm weather and because of fuel-switching spurred by low oil prices.