Yesterday’s Doha summit of the major oil producing nations is the latest attempt to bring order to a chaotic oil market.
On Valentine’s Day, Russia, Venezuela and Saudi Arabia conditionally pledged to cap output at the record January level.
Iraq lent its support but Iran emerging from sanctions seeks exceptional treatment.
Such pledges to rein in output cost the producers little since all these countries are already producing flat-out.
It will also take years of investment for Iran to boost its exports of oil.
The oil price has already risen by a third from its January trough but it remains sharply lower, by 62%, from 22 months ago.
What is behind all this chaos?
Commodity markets have become increasingly dysfunctional since 2004.
So far this year 31 barrels of oil have been traded for each oil barrel burnt in the world, which means that the market is being driven by speculators including hedge funds, rather than consumers.
High energy prices since 2004 have facilitated costly new suppliers coming on stream.
Global demand for oil continues to grow at an annual rate of 2% even though most of the growth is being driven by developing countries where consumption data is rather suspect.
There was also the disastrous assumption that China’s hyper economic growth would continue. And big consumers of oil such as airlines have done little better — Ryanair appears to have got its fuel hedging price particularly wrong.
Then there is the dodgy data.
Markets believe there are two million barrels a day more being supplied onto world markets but this belief is based on statistical errors: Many speculators are unaware that the forecasts of the International Energy Agency and the US Department of Energy rely mainly on econometric models rather than real audits.
By contrast, the industry has learned the hard way to count physical barrels. Over time, discrepancies grow which call into question estimates of surplus capacity.
The oil price is inherently unstable anyway. Output from low-cost American producers fell slower than expected because the frackers postponed shutting fields.
And the Opec nations found it an impossible task to lead a part-monopoly. The Saudis have exacerbated the problems.
Conspiracy theorists would have it that Saudi Arabia deliberately wreaked havoc with oil prices but this conflicts with the nation’s long-standing record of seeking to smoothe cycles by cutting its own output.
It was only when other producers declined to announce cuts, in November 2014, that the oil price collapse accelerated. And for Saudi Arabia what began as a limited disciplinary exercise has escalated into unsustainable deficits. Either Saudi Arabia soon slashes its military and social budgets, or its wealth will be squandered by 2020.
Other players such as Angola and Venezuela were hit even harder hit, but the stability of Saudi Arabia itself is now threatened.
Normally, high-cost oil firms exit first and this is belatedly happening now, as producers scramble to maximise their cash at hand.
The firms froze new investments but keep producing as long as they generate a marginal rate of cash, despite their accounting losses. Once a North Sea field is decommissioned it won’t return, but a bankrupt onshore American field may continue under new ownership.
The shock waves hit stock markets and wreaked havoc on Irish oil explorers. There are effectively no equity funds available.
The collapse has crucified indebted companies and hurt even those businesses with good assets.
Raising debt helps develop oil fields. However, crashing prices and slow payments lead to breaches in loan covenants.
Lenders can, therefore, swoop to acquire companies such as Petroceltic by buying their discounted debt. Even solid management with valuable assets is vulnerable.
Now is the time to buy assets, but the difficulty lies in raising finance. Oil companies don’t want to dilute existing shareholders and won’t raise money just to ‘keep the lights on’.
One strategy is to seek low-cost-and-hold projects such as licence options in the Irish Atlantic.
The big oil companies may be conservative but are not cash constrained. A good novel project will always excite expert interest.
David Horgan is director of Irish oil company Petrel Resources plc
© Irish Examiner Ltd. All rights reserved