WWiillll ooi­ill ddr­roopp ttoo $$4400??

Financial Mirror (Cyprus) - - FRONT PAGE -

When oil prices topped $140 a bar­rel in 2008, pre­dic­tions from many an­a­lysts and in­dus­try in­sid­ers pointed at $200 a bar­rel on the hori­zon and fore­cast all kinds of doom and gloom for the global econ­omy. Well, the doom and gloom came, but from a dif­fer­ent di­rec­tion, and oil fell all the way to $30 a bar­rel.

The rea­son it fell is that no one wanted it. The global econ­omy was at a stand­still and peo­ple were keep­ing both hands on their wallets and not buy­ing any­thing that was not ab­so­lutely nec­es­sary.

This time is dif­fer­ent. The story is that sup­ply pri­mar­ily due to boom­ing pro­duc­tion in the United States is out­strip­ping de­mand and the in­vis­i­ble hand is do­ing its work. The world is awash in oil, the think­ing goes, and un­til sup­ply and de­mand re­turn to rough bal­ance, prices will stay low and may go even lower.

Could oil drop to $40 a bar­rel again? If the Saudis and OPEC follow through on their cur­rent pol­icy to fight for mar­ket share, there is ev­ery chance that prices could fall that far.

Could oil prices re­main at around $40 a bar­rel for a long time? Prob­a­bly not, and that is what makes this time dif­fer­ent.

The last time the Saudis de­cided to fight for mar­ket share rather than cut­ting pro­duc­tion to raise prices was in the early 1980s, when crude prices fell to around $12 a bar­rel (about $31 in 2014 dol­lars). How­ever, the drop was ex­pan­sion­ary for the econ­omy. The money that coun­tries and con­sumers saved on oil and gaso­line was spent on other goods.

This time the drop in crude prices could eas­ily be con­trac­tionary. As the crude price falls, the in­cen­tive wanes for com­pa­nies to invest in find­ing more oil, and un­less the global econ­omy be­gins to grow strongly again, de­mand for en­ergy will re­main low.

Only 3 bln new bar­rels of re­cov­er­able oil and con­den­sate were found in 2014, the low­est to­tal in 25 years, and half the amount dis­cov­ered in the pre­vi­ous year, ac­cord­ing the Sch­lum­berger’s pres­i­dent of op­er­a­tions. That typ­i­cally in­di­cates there should be more ex­plo­ration in the com­ing year, not less, but most pro­jec­tions for cap­i­tal bud­gets in 2015 call for less spend­ing, not more.

The oil com­pa­nies them­selves are not say­ing how much it costs to pro­duce a bar­rel of oil in North Dakota’s Bakken shale play, but the In­ter­na­tional En­ergy Agency (IEA) has es­ti­mated that most drillers would make a profit at $42 a bar­rel.

Not very much profit, though, and if prof­its are go­ing to get squeezed, oil com­pa­nies will spend less on ex­plo­ration to make sure they are able to pay div­i­dends and buy back stock in or­der to keep in­vestors happy. Oil company ex­ec­u­tives do not want to pre­side over the same kind of blood­let­ting that has hit the pre­cious met­als, coal and iron-ore min­ers.

Oil at $40 a bar­rel is pos­si­ble, even likely, but a price that low is not sus­tain­able. Should the price drop that far, then the global econ­omy is in big­ger trou­ble than we think. If it stays that low for a while, the world’s econ­omy will be in re­ces­sion. Not a pretty pic­ture.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.