We are living in what can be described as a period of increased volatility. Oil and other energy prices are more volatile, stock markets are more volatile, the relative competitiveness of different regions of the world changes more rapidly than ever before, new technologies are introduced at bewildering speed - everything is happening at a faster rate than it did in the 20th Century.
In the Royal Dutch/Shell Group of Companies we are currently engaged in a process of continuing adaptation and new business creation.
As in every healthy business, this has always been the case. But, I think it fair to observe that there has been a considerable acceleration in activity in the last few years. We strongly believe that this is likely to continue.
Ladies and Gentlemen: I am delighted to be able to be here with you today at this very interesting time in the development of energy markets worldwide.
In the Royal Dutch/Shell Group of Companies we are currently engaged in a process of continuing adaptation and new business creation.
As in every healthy business, this has always been the case. But, I think it fair to observe that there has been a considerable acceleration in activity in the last few years.
We strongly believe that this is likely to continue.
We are living in what can be described as a period of increased volatility. Oil and other energy prices are more volatile, stock markets are more volatile, the relative competitiveness of different regions of the world changes more rapidly than ever before, new technologies are introduced at bewildering speed – everything is happening at a faster rate than it did in the 20th Century.
This new century already looks like it is going to be an interesting time indeed!
To survive in this increasingly volatile environment, it goes without saying, it is necessary to adapt faster, to innovate continuously and to get ever closer to your customers.
In Shell we believe we are doing that with a considerable degree of success – and we are committed to accelerating the process.
But I am not here today just to update you on Shell’s progress. I want to put these developments within the context of the broader changes, which are occurring.
Let’s look at the oil price first. Classic supply and demand analysis has proved to be of limited use in predicting oil prices – particularly in the last 24 months. Considering the fundamentals is NOT sufficient by itself – and it is doubtful that it ever has been.
Oil has always been the strategic resource and, as such, is subject to a wide variety of non-economic influences. That means that there can often be a lot of emotion in the markets and complex political and psychological influences.
At the moment everyone wants to know what will happen if prices go down? What is OPEC going to do? The honest answer is: nobody really knows.
Even if OPEC members say what they are going to do – as they have in the last few days - will it actually happen that way? Or, will there be unexpected new developments? Looking at the fundamentals, it is perhaps reasonable to point toward lower prices by the end of this quarter. But, it would be foolhardy to make any firm prediction.
What we can say with a reasonable degree of certainty is that – however much we desire price stability – it is unlikely to return any time soon. Volatility appears to be one of the few things we can predict with any degree of certainty.
Neo-classical economic theory tells us that the market price should be somewhere near the marginal cost of production of the last barrel demanded in the market.
The marginal production cost of the last barrel of non-OPEC oil is currently somewhere in the mid-teens – in between $14 and $17.
Non-economic factors – essentially political – raise the price above the marginal cost. However it is well to remember how, less than 24 months ago, the spot barrel price dropped under ten dollars.
Could we see such prices again? We don’t know. But, it would be extremely foolhardy to rule out the possibility.
We certainly have no control over, and very little influence on, the political and geo-strategic factors, which lift the price above the marginal cost of production.
It seems that some outside the oil industry still haven’t understood this basic fact. Back in the 60s or even the early 70s the major oil companies had control, or at the very least, a strong influence on oil prices.
But this is history and - ended with the rise of OPEC. Many outside the industry still don’t appear to understand this basic fact.
The major resource owners and the taxation policies of governments in major consuming markets determine the oil price level -. The oil companies do not.
This means that we have to make our operations robust at a broad range of possible price levels. Furthermore we have to position ourselves so that we can handle continuing volatility.
The company structure, the cost profile has to be extremely robust in order to handle rapid swings in revenue flows. We have to be profitable in a wide range of situations.
Now, if you get that type of mindset, it is interesting to see that you don’t spend so much time speculating about the oil price or studying it.
Instead there is a focus on other matters; on cutting costs, on getting close to the customer and on developing new products and services.
At the moment many people, particularly outside the industry, are focusing on the oil price. That is inevitable. And, it is true, we benefit from - a barrel price -in the region of $30 instead of around ten dollars.
The higher incomes are needed for investments in the exploration and production of new resources, which are necessary to meet the growing world energy demand.
But, since we have no influence over these prices, the only logical strategy for us is to ignore them and concentrate on building a strong operation at all price levels.
In European markets in the last half-year we have seen - protests of our customers who are dependant on fuel, suffering from high prices. In some markets the protests have escalated.
In the debates that have surrounded these protests the finger of blame has been pointed at just about everyone. I think there is a need for recognition of the importance of reasonable prices – we need them to keep our economies running and to ensure mobility.
Mobility is an essential part of modern societies. It does not only form part of our lives. Mobility is also a very important function for our European economy.
Fuel price rises have been driven by taxation – in most countries pump prices are more than 50 percent tax. In Germany the government takes about 70 percent of the petrol price.
It is quite acceptable for a government to decide for ecological or other reasons to use tax to bring about desired forms of behavior.
However, if you are going to – effectively – put a large group of people or industry out of business, or squeeze the consumer, then it would be wise to provide alternatives.
Alternative forms of transportation are needed, and Shell is working towards that – investing a lot, developing the fuels of the future.
What we are talking about here is essentially a process of change. For a wide range of reasons, European governments want to discourage the use of higher carbon fuels. Or they say they do – because there is still a lot of subsidized coal being produced! Leaving that question aside, there is a need to assist the process of change – not just use it to generate large taxation flows.
Short-term price volatility is, of course, just one of the change drivers now affecting the energy industry. Shell, Exxon and BP are still generally thought of as oil companies. Thirty years ago that was true.
I can’t speak for the others but today Shell is about 60 percent oil and 40 percent gas. Then we have transportation, trading, downstream power generation, renewable, and a host of other activities. We are an energy company, not a pure oil company.
Electronic business is beginning to make itself felt – particularly in procurement and in trading. Shell has set up a global trading business in order to accelerate this process and bring cost reductions forward.
We see a huge potential for both savings and growth in this area and we will develop e-business further.
Jeroen van der Veer, Managing Director of Royal Dutch Petroleum Company and Group Managing Director of the Royal Dutch/Shell Group at the 8th Handelsblatt Annual Energy Conference, Berlin, Germany
source:Shell.com
© 2001 Mena Report (www.menareport.com)
