Oil and at what cost to us?

Some things are better explained through art than article. Bob Rich is able to also show the ‘human impact factor’ of the oil price crash by way of his cartoon, “Help!, I’ve fallen and I can’t get up”. After falling from a peak in June 2014 of $107 to $44 per barrel in January 2015, the price of oil has never fully recovered, ... is it going to?

Crash: I’m sure we all remember the oil price crash of July 2008 when the price of oil fell from about $145s to just $30s a barrel in only 6 months, however this oil price crash doesn’t look the same. Most oil price crashes in the past were stimulated or triggered with either a low demand for oil or an increase in oil supply; the current price crash seems to suffer from both at the same time. Oil production in the U.S. and in other areas has been increasing, but at the same time demand for oil seems to be shadowing the economic downturn in China and weak economies in Europe and Japan.

Winners and Losers: With the price of the barrel about ($50), we can expect the price of petrol, diesel and other fuels to drop gradually. Cheaper oil at the pump could act like a shot of adrenalin to global and U.K. growth, the 50% reduction in the price of oil could be dramatic if it holds for some time. Stats suggest that it could shift £millions from producers to consumers. You and I, who might have spent on average £1,200 in 2014 at the pumps, might be £500 a year better off. This could be equivalent to a nice pay rise.

Downturn: Oil companies have announced huge spending cuts and layoffs across the world in the thousands, a trend of lost careers and lost livelihoods is taking traction and affecting many people that work in Aberdeen. Given the well documented challenges of operating in toughening economic and market conditions with a low oil price, major Oil companies are simply responding to market forces. It’s unfortunate that the workforce behind our industry is the casualty, but steps to streamline operations will ensure that companies will remain competitive, robust and operational.

There is evidence to suggests that some oil companies are now reducing production because they’re simply not making any profit. A recent survey carried out also shows that the number of rigs actively drilling for oil fell by 29%, from a record high of 1,609 in October 2014 to 1,140 in February 2015.

Vulnerable: There are no winners in the current economic and tax climate. Some oil companies are paying 80%, the highest tax rate on fields in the North Sea whilst 30% in other industries is standard. Stats indicate that we now have a situation where one third of U.K. offshore fields are in negative cash flow, that means approaching 100 fields are vulnerable to closure.

Over Supply: Stats from 2014 show us that more than 90 million barrels of oil and liquid fuels were consumed per day worldwide, and remember there are 159 litres of oil in a 1 barrel, ... that’s a lot of oil. It’s estimated that the U.S. have completed 20,000 new shale wells over the last 4 years, more than ten times Saudi Arabia’s stats; it has boosted America’s oil production by a third. The contest between the shalemen and the sheikhs has tipped the world on its head, from a shortage to a surplus.

Tactics: Saudi Arabia seem to be pushing a competitive tactic; let the price fall and put high cost producers out of business. If successful, that will certainly slow down supply and increase demand, causing prices to rise in their benefit and with their low extraction cost per barrel, you have to sit up and take note. Its estimated reserves of 266 billion barrels, ability to pump as many as 12.5 million barrels a day, and, most important, its low cost of extracting crude makes Saudi Arabia a formidable supplier.

What Next?: Will Opec, (which holds 60% of the world’s reserves and 30% of supplies), cut its own production to try to lift prices? or will they allow a further slide from the current price of $50 barrel a day in the hope of making it impossible for other oil companies to make a profit from their wells, and so ...‘drilling’... them out of business?

‘Control oil and you control nations: control food and you control the people’ ... Henry Kissinger.