After 25 years at the Bank of England, including during the height of the global financial crisis, Spencer Dale joined BP as chief economist in 2014. Here, he talks oil prices and dealing with challenging times
What does the role of chief economist involve and how does your team help support BP’s commercial decisions?
My team has three main roles: first, we provide advice to BP on the macro economy, energy markets, what is going on now and in the future, and general economic issues. Second, we are part of the public face of BP, with our Statistical Review and Energy Outlook 2035 publications. Third, we support BP’s businesses around the world; I go to different parts of the world and help regional leadership teams have different types of conversations with governments and national oil companies. I also learn from how different governments and companies react to the same issue and use that information to brief senior leadership.
Were you conscious of BP’s two major energy economics publications before you joined?
Yes, although I was more aware of the Statistical Review. There’s nothing else like it and because it’s seen as the industry bible, it helps people associate BP with rigour, deep thought and careful analytical thinking. I think people are starting to see our Energy Outlook in the same light. It helps us scope out what the world might look like and how might we perform as a company in different scenarios.
You have been with BP for just over a year now. What have been your impressions?
It has obviously been a very tough period for BP and the industry more generally. But despite that, it has been great fun. The issues are unbelievably interesting and important. How do we make sure there is sufficient energy available to help the poorest countries grow but, at the same time, do that in a way that does not harm the environment? They have to be seen as twin challenges; you cannot achieve one without the other.
As for the culture, people assume it must be very different, but the Bank of England is full of very smart people working very hard on strong delivery. And guess what? So is BP. Both institutions care deeply about doing the right thing, thinking through their strategies, and are open to different ideas and perspectives.
One of the most striking points in the Bank of England’s history over the past 25 years was Labour’s historic win at the 1997 General Election. What impact did that have?
The election result was announced on the Friday before a bank holiday and I remember Gordon Brown [newly appointed Chancellor of the Exchequer] told key Treasury officials that when the banks reopened on the Tuesday, the new Government would announce it was making the Bank of England independent. I was working as private secretary to Mervyn King at the time. We prepared all weekend. After that, we had about three weeks to set up – from scratch – the first Monetary Policy Committee meeting. A large part of the processes we established at that time remain in place. It revolutionised the Bank and policy making. Suddenly, the power was transferred to the technocrats – they weren’t perfect, but you trusted them on the basis of their technical skill. Plus, no one person had power. There were nine individual votes, each one accountable to Parliament.
You were also chief economist at the Bank during the 2008 financial crisis. What was that like?
Horrendous. l led the team that designed and implemented quantitative easing. People say it must have been exciting, but it was scary. Our job was to stabilise the economy that risked imploding. We cut interest rates to zero by February of 2009, starting in September 2008, so we had run out of normal conventional policy within seven months, and were into completely unknown territory really quickly. You learn a lot in a crisis.
In those environments, there can be no sacred cows. You have to be practical, bold and have the courage of your convictions. We achieved a lot and I am pretty proud of that, but there are things that I wish we could have done differently. I think quantitative easing worked in terms of the macro economy, but small businesses were hit very hard, as were savers and certain pension-holders.
But it is important during those periods to spend enormous amounts of time communicating, explaining your actions, being open, transparent and explaining how difficult that world is. I think that is important in maintaining the legitimacy to do what you do.
Coming on to the current economic climate – BP moved very quickly to say it thought that the oil price would stay low for a long time. What factors fed into that statement?
It was helped by thinking about the underlying factors causing the price weakness. If you consider the two most recent big drops – 2008/2009 and 1998 – both of those were driven by economic recessions, the global recession in 2008 and the Asian crisis in 1998. So, we saw big falls in demand. Those tend to correct themselves relatively quickly. In contrast, the price weakness this time was caused by strong growth in supply, initially as a result of very strong growth in US shale. Normally, world demand for oil grows by about 0.8 million barrels a day per year, but at the end of last year US shale, on its own, grew by 1.6 million barrels a day. Last year, we saw a combination of supply increments from Iraq and Saudi Arabia that added a further 1.5 million barrels a day. What we know from history is that the oil market takes an awful lot longer to adjust to supply shocks than it does to cyclical demand shocks.
Interestingly, though, US shale is far more price responsive, because a producer can set themselves up and start drilling very quickly. Moreover, if the price falls it’s a lot easier to reduce production. Consequently, the supply features of the oil market are changing and over the next 20-30 years, price volatility might fall as a result. This contrasts with the past in which volatility in prices was a feature of a market in which both demand and supply were relatively insensitive to price, because you need to put petrol in your car every day and it is not easy for the conventional industry to simply turn off the taps.
You’ve spoken publicly about the ‘new economics of oil’. Could you explain what that means?
I think the big message is that shale is changing things. US shale accounts for less than 5% of the market, so we should not think it is going to dominate everything, but it is enough when thinking about how markets respond to disturbances. It acts like a shock absorber. The second thing is that conventional oil is dominated by big oil companies with large balance sheets that are not very sensitive to banking crises. US shale, though, is made up of 400-500 small producers, many of them with negative cash flow, so they have to keep borrowing to invest. What we observed in the financial crisis is that banking shocks amplify volatility. Up until now, the supply side of the oil market has been fairly insulated from that.
Third, in the past, conventional oil has tended to mean big engineering projects, each one slightly different from the last. Shale is more like manufacturing. You use the same rig, same location, drilling over and over and over again and in doing so, your costs come down, efficiency and productivity improves, and so shale has thrown down the gauntlet to conventional oil: can you start doing greater standardisation?