Expert Interview: Marc de Saint-Gerand

As an oil and gas professional, what is your personal assessment of the current oil price?

High volatility in the current market, especially during the last few months, leaves little room for prediction. Until recently, oil prices had increased by 170% over the past 5 years, while demand had increased only by 7%, and daily volumes on the spot market had increased by 25% in the same span. These three figures reflect one fact: oil, like gold, is not purchased for its sole intrinsic usage, and the volume exchanged on the market is not strictly equal to the physical demand. For instance, involvement of “nonproducer/nonconsumer” investors, such as private equity funds or hedge funds, grew in the recent past. These funds were looking at crude oil’s volatility in a rather flat equity market. They might have played an important role in keeping the market price at historical high levels, until recently.

A high-price environment (with oil rising from USD 55 to 147/bbl between 2005 and 2008) gave a strong signal to oil companies: major developments were decided, efforts were made to discover and develop new sources of oil—such as ultradeep offshore or oil sands—and existing fields were optimized for improved recovery.

In reverse of this, the current market slump threatens the balance between supply and demand in the mid to long term. A weaker crude price might put on hold or jeopardize the development of new sources of oil and might reduce the reserves available, by lowering cutoffs on certain projects and delaying other projects. A low oil price might also delay the shift to nonfossil energy, reduce the appetite for development of alternative energies, and entice consumers to keep their vehicles, and businesses, running on oil. In the longer term, such a crisis might be the root of the next price peak.

What actions would stabilize the price of oil?

Some key drivers have a strong impact on the price volatility of oil, but most of them are complex components, and although the idea of stabilizing oil price is tempting, it might be quite difficult to implement.

  • Speculation in the oil market. The oil market is not the simple meeting of producers and consumers; many other actors play different games—oil traders, financial investors, and hedge funds, for example. Stability or volatility is a consequence of the action taken by these actors that may have conflicting interests.
  • Currency. Oil currently is denominated largely in US dollars. When the dollar falls vs. other currencies, the price of crude tends to increase.
  • Oligopsony and oligopoly in the markets. Oil producers influence the market, but oil consumers also have an important impact through their stock policy. The oil market appears to be fairly imperfect, and the supply/demand balance by itself might not lead to a natural equilibrium.
  • Behavioral economics. After all, the oil market is driven by the perceptions about production, consumption, and transportation by all of the actors involved. A large part of the current price is driven by more or less rational anticipations.

To what extent do you think the world depends on oil?

On a statistic perspective, the dependency of the world on oil as the primary source of energy is obvious. For 2007, oil represented 35% of all energy sources, ahead of coal (28%) and gas (24%).

Dependency of the OECD (Organization for Economic Cooperation and Development) countries on oil (40%) remains fairly important, but the new component of the equation is the dependency of the developing countries. Even though oil only counts for 20% of China’s energy consumption, significantly behind coal (70%), it has been growing by 7% annually over the last 5 years.

Nevertheless, if we consider the dependency on all hydrocarbon sources (oil, gas, and coal), then the picture is dramatically different: the OECD is 85% dependent and China 93%.

What is your prediction for oil prices in 2009?

This question is tricky, and any predictions are very likely bound to be wrong. The variation of crude prices in 2008 illustrates how difficult short-term predictions are. Nevertheless, in the longer term, increases in demand and in technical costs will be reflected in the crude price. We might then observe prices close to the 2006–08 levels on a real-term basis.

Marc de Saint-Gerand is an Associate for the Merrill Lynch Energy and Power Team, London. He previously worked as an economist for Total in Paris and Doha. Marc holds an MSc in public affairs from The Paris Institute for Political Studies and graduated from the HEC Paris School of Management.


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