Tonight:
4°c
The oil price ticked up as Hurricane Gustav headed for the oil installations in the Gulf of Mexico. Now it appears to be losing strength and passing through without inflicting anything like the damage we saw in 2005 when Katrina flooded New Orleans, prices seem to be sliding down again.
It is anyway something of an artificial upward blip because, although the Gulf accounts for a considerable slice of US oil production, the speculators ignored the fact platforms and installations today are far less vulnerable than they were the last time a hurricane struck.
After Katrina and the other storms of that year, the insurance industry got a bill for almost $70 billion (£39 billion). Not all of this was for damage to oil production — flooding in New Orleans cost a bit, too — but enough of it was for the industry to be able to re-equip itself with modern kit at the insurers' expense. So today's platforms are floating rather than fixed, and can be towed out of the way when the wind threatens to blow.
Tugs strong enough to tow them have replaced the old rust-buckets formerly expected to fulfil that role. Similarly, the modern pipelines that link the platforms and are used to get the stuff ashore can now be cut loose and sunk to the relatively safety of the seabed, only to be automatically refloated and plugged together again when the storm has passed.
The technology has advanced hugely and the theory is — though it has not yet been fully tested — that even when oil production is hit by storms, the damage will be much less severe and the time it takes to get back to normal output will be much reduced .
That is good news for the insurance industry, but the rest is not so cheerful. Another of the innovations since Katrina is an insistence by the industry that all insurance cover is in place before the official start of the hurricane season, so most of the policies were put in place in May and June when £1 was still worth $2. Unfortunately, sterling has since been on the slide and is heading rapidly towards $1.80, a 10% fall. That means any claims incurred now will cost 10% more than expected when the policies were written. By common consent, the insurance industry is making next to nothing on its underwriting book anyway, and is in no condition to absorb an additional 10% hit.
The implications go wider than this week's storms — or the others we will probably see in the next few weeks. It is a feature of the British insurance industry that its costs are mainly in sterling, yet the dollar remains the most important source of premium income. The more the pound slides, the more painful it will be for the industry to meet its claims — particularly as many insurers have been dipping into their reserves this year to smooth out the decline in their earnings. In time, the weaker pound will come back to them in the form of higher premiums. But it has a lot of discomfort to get through first.
Tale of a rapid decline and fall
Dresdner Kleinwort, the London-based investment bank, is said to be the likely target for significant job cuts as a result of the purchase, announced yesterday, of its parent Dresdner by Commerzbank. It is a deal born in Germany and with the German retail banking market very much in mind. This means that the investment banking activities in London are peripheral and unfortunately for those working in the firm they seem destined to be treated as such.
The probability is that the Dresdner Kleinwort name will disappear, which may not mean much to most people working in the City today but is in fact highly significant as a barometer of relative decline. Back in 1980, which is not all that long ago in the history of nations, or financial centres for that matter, Kleinwort Benson, as it was then known, was the largest of London's merchant banks — bigger than Lazard, Rothschild, Morgan Grenfell or Warburg, the other stars of that era.
Those were, of course, still the days when the City was a series of cottage industries before the creation of integrated financial houses.
Staff levels were measured in the hundreds rather than the thousands but what is telling is that, in terms of size and staff levels, Kleinwort Benson in London was pretty well on a par with Goldman Sachs in New York.
There is much that could be said about how their paths have diverged since then but suffice it to say that Goldman Sachs has become one of the most successful financial organisations in the world and a giant envied and feared in equal measure by most people who come in contact with it.
Kleinwort, in contrast, is a subsidiary of a middle-ranking German banking parent which seems uninterested in it.
It is hard to remember that only a generation ago they were mentioned in the same breath.
