Submarine Cables and the Price of Oil
By Stewart Ash
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Whenever global macro economics is discussed there are two subjects that generate more column inches than any other. These are 1) the price of oil and 2) the benefits of reliable broadband telecommunications to business development. As this issue of SubTel Forum is dedicated to the oil & gas industry it seemed worth considering whether there is any link between these two major economic drivers and whether telecommunications in general, and submarine fibre optic cables in particular, can have any effect on the price of oil. The ITU mission statement is “bringing the benefits of ICT to all the world’s inhabitants;” and the more detailed language suggests a strong link between access to telecommunications and economic development. Certainly more and more national and international businesses are organised around cost effective broadband connectivity to the Internet, and as we know the Internet, in turn, is supported by the global network of submarine fibre optic cables. The loss of this connectivity through major outages, such as that caused by the seismic activity off Taiwan and the more recent damage to cables in the Middle-East, has demonstrated that many businesses are almost totally reliant on broadband access to operate effectively. These major failures of the existing cable network have led, inevitably, to demands from the end users for greater reliability. The solution, of course, is alternative restoration paths on more diverse routes. In other words, new cables; good news for the system suppliers! Another relevant aspect worth considering is the lack of infrastructure in several areas of the world, most notably Africa. Many of the countries affected consider that their economic development is being held back by lack of any international connectivity or, where it does exist, development is limited by the high cost of such connectivity compared to countries elsewhere in the world. Again, new cable systems appear to be the answer if they can be funded, which is once again good news for the system suppliers! These two factors do seem to support the argument that good telecommunications has a direct effect on economic growth, as well as being the main drivers in the current resurgence of the submarine cable supply market.
If reliable broadband telecommunications is a prerequisite for effective operation of international businesses this principle should be applicable to the oil & gas industry as well as any other. Based on this assumption it might be reasonable to further postulate that there should be a link between broadband connectivity and the price of oil. However, I believe this is a step too far. In my view the price of oil is almost entirely dependent upon market confidence in continued supply and available reserves. If we look at recent price movements in the oil market it will make the point. The price of a barrel of crude reached an all time high of US$147.27 in July. However, since then the price has been falling. The main reasons for this fall were concern among traders that the high price and the deepening global slowdown would impact future demand, combined with the recent rally in the value of US currency making oil less attractive as a dollar hedge. This downward trend in price has been halted recently; prices are again rising, this time based on fears of interruption to supply as hurricane Gustav moved into the Gulf of Mexico and was up-rated to a category 3 storm. The Gulf of Mexico provides 26% of the USA’s crude oil and 14% of its natural gas and, because of the threat of Gustav, production was ‘shut in’ on a number of offshore facilities and pipelines were emptied of oil & gas. Market fears, which drove the price up, were exacerbated by what had happened in 2005 when Katrina and Rita (both Category 5 storms) hit the Gulf of Mexico. These storms destroyed 113 offshore platforms and damaged 457 pipelines, disrupting oil & gas supplies for significant periods. It took the operators a long time to get offshore facilities back to full production and fear of a repeat performance was a major factor in the recent price increases. Hurricane Ike, a category 4 storm, is now moving into the Gulf of Mexico, delaying the restart of oil & gas production. At the time of writing, the price of oil was US$108.95 in after hours trading. This increase in price is likely to ease pressure from hard line members of the OPEC oil produces’ group who want to maintain the price above US$100 a barrel. However, Saudi Arabia are still likely to come under pressure to reverse the decision, made earlier this year, to increase output after heavy lobbying from the USA. Clearly, broadband telecommunications is not a consideration in these price variations.