API: Outlook for oil prices flat for another 12 months?

They may be focused increasingly on external pressures involving the environment and local politics (see related story, p. 36), but the thoughts of oil and gas company executives attending the American Petroleum Institute annual meeting in San Francisco last week were never far from current oil and gas prices and when they will change. Peter Bijur, Chairman and CEO of Texaco Inc., told attendees, "At no time in the past half century has the world economy faced a challenge of this magnitude.

Nov. 16, 1998

3 min read

Peter Bijur, Chairman and CEO of Texaco Inc., told attendees, "At no time in the past half century has the world economy faced a challenge of this magnitude. About 40% of the world's economy is in recession. It is taking a heavy toll on our business."

Bijur chaired a panel convened to discuss the outlook for the world's economies in general and energy markets in particular.

The panel's conclusion? Industry is faced with "an era of low oil prices for some time."

Where opinions differ substantially is on how long is "some time" and whether economies-and therefore petroleum demand-will decline even more before prices recover.

"We are in for a period of flat commodity prices, especially oil, for the next 12 months," said panel member James Clad, Senior Associate, Cambridge Energy Research Associates (CERA).

Michael Boskin, Chairman, Consumer Price Index Commission, expects "2-3 years of soft energy prices," until signs of an economic rebound are apparent. "Slow growth and low inflation" can be expected in the U.S.

Business spending is a key, said Boskin. If it suddenly declines, it "could throw the slow-growth environment into a recession." Boskin warned that "business cycles are not gone forever."

In a previous panel session, William Cvengros, CEO, Pimco Advisors LP, said that "a recession is possible" as U.S. growth slows in 1999. He expects interest rates on long-term government bonds to range from 41/2% to 6%, and return on equities to move toward the long-term mean of 10% after years of spectacular gains. These conditions make it very hard for commodities businesses to grow, said Cvengros.

Asian recovery begun?

Daniel Yergin, CERA chairman, told an earlier session at the API meeting that "Asia was the starting point for the distress the industry is now in," but a lot of elements are in place for the recovery.

"A rebound is in the making," said Yergin. Thailand and South Korea have made the most progress, he said.

According to Yergin, current oil market conditions represent the "first time in 25 years that low prices resulted from a decline in gross domestic product. Asia created this situation."

A study released last week by CERA, however, concludes that "Recovery and renewed rapid growth will revive most of the economically depressed countries of Asia by the year 2000, as long as another round of massive devaluations can be avoided and world export markets remain satisfactory.

"The oil industry was the first major industry outside Asia to suffer the effects of the Asian crisisellipseAnd the global oil industry would be among the first to respond to firm proof of recovery in Asia," said the report by CERA's Dwight H. Perkins.

Clad said the rebound in Asia will be "patchy." But the risk of "another wave" of troubles in Asia is relatively low, he said. Despite a move away from extreme centralization, institutions such as state oil companies Pertamina in Indonesia and Petronas in Malaysia will remain strong, according to Clad. Corruption will continue to be a factor, and rivalries among countries will become more intense.