OPEC's dilemma; let prices fall or curb output

Housing market; John Laing

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Laing announces £73m rights issue as Sir Martin steps down

First signs emerge of slowdown in housing market

Modern prosperity is built on any number of different foundations, but there is one great rock that stands out above all others – oil. Without it, many of the things we today take for granted would not be possible, and human endeavour would still most likely be stuck back in its late 19th century form. All economies these days rely to a greater or lesser extent on oil to keep the cogs turning, but none more heavily than that of the United States.

America's declaration of war against terrorism is motivated primarily by revenge and its determination to snub out the terrorist threat to its own citizens, but there is also an important geo-political undercurrent – the vast oil reserves of what Americans continue to refer to as the Persian Gulf.

The Gulf war was all about oil, and so, to an extent, is this one too. Nobody believes it remotely possible that Osama Bin Laden might achieve his aim of a Saudi-based Islamic state with himself as its leader, but as an armed and dangerous opponent of the present Saudi regime, Mr Bin Laden is as much an enemy for the threat he poses to American interests in the Gulf as for his terrorism.

There is, however, a much greater threat to Saudi stability than Mr Bin Laden – the oil price. In 1998 it briefly hit the $10 a barrel mark, seriously undermining Saudi Arabia's finances and forcing the country for the first time to borrow from the world's money markets. It was a perilous time for Saudi's royal family, who's continued power rests largely on its ability to deliver on Saudi's oil wealth. All of which makes the present situation a remarkable one.

Since that nadir in the oil price, Opec has rediscovered itself and been highly effective, through constantly adjusting supply according to economic circumstance, in keeping the oil price within its targeted range of $22-$28 a barrel. After a brief spike up in the immediate aftermath of the terrorist atrocities, caused by the belief that supply might be interrupted by a war in the Middle East, the price has collapsed and at $20 for Opec's reference basket of crudes, it is once more below the target range. In Vienna yesterday, oil ministers from Opec nations, including Saudi Arabia, professed themselves unperturbed by the weak price, and they announced that there would be no attempt to curb supply in order to get it back up again.

In the circumstances, this was the right thing to have done. It would have been crass and insensitive to have imposed curbs given what's just happened. By allowing oil prices to fall, Opec is doing its bit in the battle against global recession. Cheaper oil means lower costs for oil consumers and can be as powerfully reflationary as cuts in interest rates. But Opec's motives are not entirely altruistic. Outright recession would be likely to drive oil prices even lower, threatening Opec member revenues and destabalising their economies. The big question for the likes of Ali al-Naimi, Saudi's oil minister, is whether Opec can continue to command the ring in the event of a continued slide in prices.

The dangers are obvious. If the oil price slips too far in anticipation of a prolonged global slowdown, then it may be difficult for Opec to control its members. Far from curbing production, some might break ranks and produce more in an effort to safeguard falling revenues. That's essentially what happened after the Gulf War, when Opec in effect lost control over the oil price. Opec's next meeting isn't until early November. With events moving so fast, that's a long way away. Don't be surprised to see a renewed effort to curb production well before then.

Housing market

If the economy is heading for recession, then surely the housing market is heading for another slump too? Not according to Britain's ever-optimistic mortgage lenders and estate agents. This is not like the early 1990s, they insist. Interest rates are low, housing is more affordable, and with the stock market in the doldrums, property is still regarded as the soundest of alternative investments. There's no reason either for house prices to fall or for the housing market to slow.

Well, maybe, but what little evidence we so far have beyond the anecdotal is beginning to point the other way. The number of new mortgage applications was falling sharply even before the terrorist attacks in America and a new survey shows prices in London slowed to a standstill in September. One vital ingredient to house price inflation in London and the South-east, the boom in the City and the fat bonus cheques that have gone with it, has been removed. Many firms will be lucky to see bonuses at all this year, and if the rumours are true, it's only a matter of time before the P45s start raining down on the City like confetti. Once that happens, we might even begin to see some distress selling, particularly at the higher end of the housing market.

The other big support to the market is affordability. Low interest rates and a highly competitive mortgage market have made larger mortgage loans that much more affordable, driving up prices. Affordability has always been a bit of an illusion, for although the cost of servicing a loan decreases in a low-inflation environment, the cost of repaying it increases correspondingly. This uncomfortable truism has failed so far to dent enthusiasm for trading up, but once job insecurity begins to creep into the collective psyche, it certainly will. People will begin to worry about their ability to repay the loan. So although a return to the negative equity conditions of the early 1990s seems improbable, a prolonged hiatus in the housing market – low activity with stagnant or even declining prices – looks all too possible.

John Laing

Now that it is finally complete, the Millennium Stadium in Cardiff is proving a rip-roaring success, thanks largely, it has to be said, to the fiasco over the new Wembley. The actual building of the stadium, however, proved the straw which broke John Laing's back and yesterday it put an end to the misery with the sale of its construction arm for a token £1.

The misery for shareholders, on the other hand, continues. On top of a £30m book loss on the sale and a £104m cash outflow once inter-company loans have been cancelled, there's a deeply discounted rights issue, the announcement of which halved an already battered share price. No surprise, then, that Sir Martin Laing, the only member of the original Laing family still on the board, is doing the decent thing and resigning as executive chairman.

Laing's has been in construction for 150 years. But pedigree means nothing when all you can earn on turnover of £1bn is £100,000 in profits even in a boom year like 1999. In the last 18 months, things have got even worse as liabilities on already completed projects come bouncing back. In the good old days, construction firms bid low and then claimed high, but the advent of guaranteed maximum fixed price contracts has put paid to all that.

Only those who can ruthlessly cut costs to the bone or survive through sheer scale, like Vinci of France, seem capable of building themselves a future. The once big players in the British construction industry seem increasingly to be retreating into the business of facilities and PFI management, leaving others to do the physical construction. It may be the way to go, but it seems an abdication, none the less.

j.warner@independent.co.uk