No end of cheap oil

It shows at the pumps. Even people who do not regularly scan the financial pages for market movements will be aware that oil prices are soft, for petrol is the one high- street price that follows very closely the price of the underlying commodity. If the coffee price falls, we might notice a few months later that jars of Maxwell House are not quite as expensive as they used to be. But since the raw material represents such a small part of the shop price, not much shows through.

Not so with oil. Thus, although some outlets managed to push the unleaded litre through the 50p barrier, the cheapest outlets are still selling petrol below 45p - not that much more than the price 18 months, two Budgets and a sterling devaluation ago.

Petrol is, of course, only one of the oil products and the European market for petrol happens to be particularly weak at the moment - prices for diesel fuel have held up rather better (or worse, from the consumers' point of view). Nevertheless, the message at the pumps mirrors the message at the well-head - oil is cheap.

From the point of view of the oil companies - Shell reported its third-quarter figures yesterday - this is mixed news. They lose as producers of the raw material if the price goes down, but they gain as distributors. In that sense, the price does not matter too much - though a high price does tend to help the traditionally 'crude-rich' companies like BP and hurt the 'crude-poor' like Shell.

But from the point of view of the world economy, the price of oil is enormously important. Not only has cheap oil - and hence cheap energy in general - helped to hold down world inflation, it needs to stay cheap at this stage of the world economic cycle if the recovery is to be sustained.

There is one golden rule about predictions of the oil price, and it is that the experts are usually wrong. Even when they get the politics right, they come to the wrong conclusion about the price.

Take, for example, the learned report produced by Salomon Brothers in October 1990 after the invasion of Kuwait by Iraq, but before the Gulf war. It constructed three possible scenarios - Iraq holding on to Kuwait, Iraq withdrawing after international pressure and military defeat of Iraq.

The oil price on this third scenario was projected to stay in the dollars 30-dollars 34 a barrel range through 1991 and 1992, falling to dollars 23-dollars 25 this year and dollars 17-dollars 19 in 1994 and 1995. In fact, oil was in the dollars 20-dollars 24 range by mid-1991, down to dollars 20 in 1992 and is in the dollars 15-dollars 16 region now.

Actually, as oil price projections go, Salomon's was not at all bad in its overall direction. It got the fact that the oil price would fall right. What it got wrong was the pace of the fall and the level to which the price would go.

The point of looking back at these projections is not to be mean to Salomon, for the work really stands up very well in the light of subsequent events. Rather, it is to show how a large public health warning has to be attached to even the best work on the subject.

Yet there are some sensible things that can be said about the oil price now. The first is that the need to pump by most of the Opec states remains high. Saudi Arabia needs to do so for the first time in a generation, for its budgetary arithmetic is quite tight. It needs the revenue. It is no longer in the luxurious position of making judgements on its production level on political grounds as the 'swing producer' of Opec.

The second is that production from Iraq is overhanging the market - indeed, that is the main factor holding down the crude price.

The third is that though on a long view the supply of oil is tight - it is the tightest of all the fossil fuels - it has not come down. There is roughly 30 years' supply left at present consumption levels, and there has been for the past decade. Each year, the world seems to discover roughly the same amount of oil as it has used.

Estimating the real size of reserves is a hit-or-miss business, and the oil companies are often accused of underestimating their true size. But there is no reason to suspect anything other than natural caution on their behalf. Oil is still being discovered. The sensible non-specialist assumption should be that this 30-year supply prospect will continue for a while.

Put these three points together, note the continuing efforts at conservation throughout the Western industrial world, and the working assumption that would emerge would be that oil is likely to remain cheap at least for the next three or four years, maybe until the end of the century.

That is probably right. If it is, a surge in energy prices is unlikely to threaten the world recovery or trigger a general increase in commodity prices. Our petrol prices will continue to creep up, but this will be because it is one of the few ways in which a country can increase tax revenues without losing such revenue when people switch their purchases to neighbouring countries. Britons can bring back a year's supply of wine from Calais, but the French can bring only one tank of fuel back from Dover.

So we will, for the next few years, see a further move back to the situation of the early 1960s, where the lion's share of the tax on oil products accrues to the consuming country's government, not to the producing country - a radical shift from the situation of the early 1980s.

There are only two obvious possible events that would upset this relatively sanguine outlook. One would be an interruption of supply from the Middle East, which hardly bears thinking about for it would occur only were there to be further military action.

The other would be a sharp rise in demand, which is likely to come only from China, the only economy in the world large enough and growing fast enough to have a global influence.

This does bear thinking about, for China will probably move from being a net exporter of oil to being a net importer some time next year.

But, given the ample world supply, that will not have an impact on prices for two or three years. Oil will be cheap for a while yet.