Philip Law takes a look at the slippery situation of oil and how with some complex influencing factors, we might have to “learn to live” with increasing unpredictability.
Readers of a certain age will remember the good fortune of Jed Clampett of 'The Beverley Hillbillies' in the late sixties who struck oil on his ramshackle Tennessee holdings. The oil was hailed as ''Black gold, Texas tea,” and even then, with oil just a few dollars a barrel it was seen as an immediate passport to untold riches. Poor old Jed would certainly have lost count of his wealth by the 1970s and become quite bewildered by its fluctuations. Indeed, he wouldn’t have had any tools to help him anticipate oil price movements because 'event risk' suddenly entered his settled world and this gradually became the chief determinant of oil prices.
Whilst the recent decline of oil prices and its consequence of dramatically lower polymer prices may, in one sense, have come as a shock, if we take a much longer perspective we realise that we have actually been on one very long 'big dipper' rollercoaster ride since 1973 and that the political risk factors which have come to shape oil prices have never been as intense as they are today. Their first serious manifestation was in 1973, with an OPEC oil export embargo by several Arab states prompted by their hostility to Western support for Israel. This was followed in 1979 by the Iranian revolution, which caused a further oil crisis. In the meantime, the development of competing sources of energy, nuclear power, renewables and now shale gas added to an increasingly complex picture.
Today, we now have the unpredictable behaviour of new 'states', some self-styled, like ISIS, others, more legitimate, like Southern Sudan, taking control of oil production. In some older established countries, Iraq for one, we have new Governments, groping towards greater legitimacy, struggling to restore oil production to former levels. Territorial disputes, such as that between China and Vietnam in the South China Seas, also have the potential to cause serious international stress, even threatening to escalate into full-scale warfare as in the Ukraine. If this is not enough, conspiracy theorists, if they are to be believed, maintain that the price of oil can be manipulated and used as a diplomatic weapon to isolate offending states.
All these factors of course are much less susceptible to traditional risk management techniques and quantitative analysis. They are not only beyond the comprehension of Jed Clampett, but also the most sophisticated analysts the financial world can sport today. We will have to learn to live with increasing unpredictability.
One very unfortunate 'unintended consequence' of the drop in oil prices is that the business of recyclers involved in the plastics packaging market has been severely compromised. The problem, however, doesn't stop with the recyclers, as the recycling record of the whole plastics packaging supply chain is put at risk. The BPF has called on companies in the downstream of the industry, when they are considering their materials selection policies, to keep to the fore the fact that high recycling targets have to be met under the Packaging Waste (Producer Responsibility) Regulations and that many individual Corporate Social Responsibility programmes support increased recycling levels. The carbon saving and resource efficiency benefits of plastic products has been enhanced by the increased levels of plastics recycling seen today. Plastics recycling is such an essential component of the whole chain's sustainability message and we cannot allow our record to regress.