A tricky time for making forecasts in the oil industry

For the oil industry, it was the year of the unthinkable.

Who would have thought that crude oil would plunge below $11 a barrel? That Exxon would agree to acquire Mobil for $80 billion, reuniting the two biggest pieces of the Standard Oil Trust? That the crown prince of Saudi Arabia would court Western oil companies, seeking new investments in his country? That a new alliance between the Organization of Petroleum Exporting Countries and nonmember nations like Mexico would emerge to try to push through cuts in oil production?

Whether these developments will lead to more surprises depends, of course, on the price of oil. According to a survey of 31 analysts by First Call, the average price projection for 1999 is $15.05 a barrel, slightly above the average of about $14.40 in 1998. Ann-Louise Hittle, director of world oil at Cambridge Energy Associates, a consulting group, sees prices remaining under more pressure than Wall Street's consensus estimate. She has projected an average price of about $13 a barrel for light sweet crude oil for the coming year if OPEC decides at its meeting in March to keep production at the currently reduced levels. But if OPEC members cannot agree to keep these cutbacks in effect, she said, then the price could fall below $10 a barrel -- a further economic shock to the oil-producing countries. If OPEC and other producers decide, however, to cut production more, making even less oil available, then Hittle expects the average to go above $14 a barrel. With the oil market in turmoil, some analysts say forecasts about prices and the industry are difficult to make -- especially since many 1998 forecasts were far off the mark. "If next year is anything like this year, we should look for the opposite on every one of these issues," said John Hervey, an analyst for Donaldson, Lufkin & Jenrette in London. If that contrarian view is the case, here are some possibilities, seemingly as unthinkable as the events of 1998: Despite predictions, other big companies may wait before rushing into huge mergers like the Exxon-Mobil deal. The Saudis may open up more of their industry to investment than most top industry executives now expect. OPEC may be replaced by a stronger new group that includes major new producers like Mexico, Norway and Russia. And prices may recover faster than expected, and the industry may have to scramble to keep up with surging demand. Right now, most of the industry is still trying to survive in a world of sustained low prices and only modest growth in demand. The largest private oil company, Royal Dutch/Shell Group, said last month that it would sell 40 percent of its chemical business, cut some of its 105,000 employees and take charges of $4.5 billion in the fourth quarter. In addition, thousands of jobs will be cut by Texaco, Conoco, Shell and Chevron. British Petroleum and Amoco, whose merger was approved on Wednesday by the Federal Trade Commission, plan to shed 6,000 jobs. Exxon and Mobil anticipate cutting 9,000 jobs after their merger and saving about $2.8 billion a year. But some analysts and consultants wonder whether such severe cutbacks will leave the companies unprepared when demand picks up. It was only last spring that the industry was worried that not enough sophisticated drilling rigs and skilled crews would be available to meet their exploration programs. Since then, most major companies have announced plans to spend less on exploration this year by stretching out the completion of projects already begun. Accordingly, they have laid off skilled workers, some of whom had gone through expensive retraining. "Everybody is pulling in their horns and lowering their costs just as quickly as they can," said David Moore, a partner at Andersen Consulting who specializes in energy. "The big danger is losing people to other industries. If Asia got back on a fast-growth track, it's very hard to recover human talent when it disappears into other industries." There is also a danger that the oil service industry, which had finally decided to build new equipment, will again pull back and dismiss welders and other skilled workers it has spent the last two years bringing back into the fold. "The fleet of offshore supply boats is between 15 to 20 years old," Moore said. "There are no new boats being built, and there will be shortages of certain types of equipment." But if the past is any guide, such warnings will be ignored by industry executives, many of whom are preoccupied with cutting costs for short-term gains rather than focusing on long-term strategies. J. Robin West, chairman of Petroleum Finance, a consulting group, said companies had little choice but to cut expenses since crude oil prices could stay low well into 1999. But, he added: "You have to take risks in the process. The people who will make the money are the ones that take the risk now." Keeping a company growing for the long term while cutting back in the short term is "extremely difficult to do," he said. "There are very few who can do it." The hard times for the industry have been a boon to consumers because of cheaper gasoline prices, which are averaging less than $1 a gallon in many parts of the country. Adjusted for inflation, gasoline is as cheap as it was in the 1950s. As always, political developments in the Middle East and Russia could send oil prices sharply higher. With the average fuel economy of all vehicles dropping in recent years because of the growing popularity of sport utility vehicles and with energy use rising despite advances in technology, the U.S. economy is becoming more vulnerable to such spikes in the price of oil. The danger, as Merribel Ayres, president of Lighthouse Energy Group, another consulting group, put it, is that "people will get in the habit of enjoying the glut."

Copyright 1999
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