Monday, 21 September 2009

Oil has always been a cyclical industry

Oil, always controversial but necessary for everyday life in the 21st century, hit the news in two separate ways today. First came the news that oil prices have fallen again due to signs that demand is not recovering due to the recession, and that it was unlikely that recovery in prices would come until we see a sustained economic recovery across the world. Secondly, the CEO of French oil company Total warned that when recovery comes we may see a shortage of oil as a result of cutbacks in exploration caused by the recession.

While M. de Margerie is quite correct, he is of course displaying the sort of foresight about the economic cycle that only seems to be displayed in recession, i.e. that good times are around the corner (the bad times that follow booms are rarely publicly predicted by CEOs for obvious reasons). However, its unclear that we should worry about this issue unduly because oil is of course a commodity industry (one where the product produced is homogeneous with little scope for differentiation). As the graphs on WTRG Economics' site indicate oil has a long history of fluctuation related to supply, and the effect of political events upon supply. Conversely periods of prosperity and relative political calm, such as the late 1950s and early 1960s have tended to see production gradually opened up with prices falling away. If we look in the long term we see that prices between the original establishment of the industry in the 1870s and the First Oil Crisis of 1973-4 had always bobbed up and down through supply and demand cycles, albeit by a far lesser degree than post 1973. If we predict however that the next spike is likely to be around $100 then we can predict that as we begin to climb to that spike then exploration will be opened up, with some fields ready to be brought on stream shortly after that spike. Needless to say, it seems likely that Total can gain a lot from the likely 'shortage' to come.

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About Me

London, United Kingdom
I'm Lecturer in Management at The York Management School, at The University of York, UK. I teach strategic management to undergraduate and masters students, as well as running the masters dissertation module. My research focuses on business and management history.