ugg bags and purses Are low oil prices here to stay
Predicting the oil price is a bit of a mug’s game.
There are simply too many variables involved to make any kind of meaningful, definitive forecast.
What we do know is that, despite a recent upturn, the price of oil has slumped almost 50% since last summer following the longest running decline for 20 years.
And we know why US shale oil, and to a lesser extent Libyan oil returning to the market, has pushed up supply while a slowdown in the Chinese and EU economies has reduced demand.
Add to the mix a strong US dollar making oil more expensive in real terms, pushing demand even lower, and you have a recipe for a plummeting oil price.
A series of articles looking at how the world will meet increasing demand for energy and the need to cut CO2 emissions linked to global warming, using old and new technologies
And this was no empty threat. Despite furious opposition from Venezuela, Iran and Algeria, Opec kingpin Saudi Arabia simply refused to bail out its more vulnerable cohorts many Opec members need an oil price of $100 or more to balance their budgets, but with an estimated $900bn in reserves, Saudi can afford to play the waiting game.
Opec now supplies a little over 30% of the world’s oil, down from almost 50% in the 1970s, partly due to US shale producers flooding the market with almost 4 mb/d from a standing start 10 years ago.
“Given this scenario, who should be expected to cut production to put a floor under prices?” Opec argued last month.
Equally, Saudi is not prepared to sacrifice more market share while its competitors, not least US shale oil producers, prosper. Safe in the knowledge that it can withstand very low oil prices for the best part of a decade, it would rather stand back and, as Philip Whittaker at Boston Consulting Group says, “let economics do the work”.
The implications of Opec’s decision, therefore, go way beyond sending the oil price crashing even further.
“We have entered a new chapter in the history of the oil market, which is now starting to operate like any non cartel commodity market,” says Stuart Elliott at energy specialist Platts.
The fallout has been immediate in many parts of the industry, and promises to wreak further havoc in the coming months and, quite possibly, years.
‘Serious risks’Without Opec artificially supporting the oil price, and with potentially weaker demand due to sluggish global economic growth, the oil price is likely to remain below $100 for years to come.
The futures market suggests the price will recover slowly to hit about $70 by 2019, while most experts forecast a range of $40 $80 for the next few years. Anything more precise is futile.
At these kinds of prices, a great many oil wells become uneconomic. First at risk are those developing hard to access reserves, such as deepwater wells. Arctic oil, for example, does not work at less than $100 a barrel, says Brendan Cronin at Poyry Managing Consultants, so any plans for polar drilling are likely to be shelved for the foreseeable future.
World’s top oil producers, 2014 (million barrels a day)
US: 11.75Saudi Arabia: 9.53
North Sea oil production is also at serious risk, certainly in terms of new wells that need an oil price of about $70 $80 to justify drilling. Indeed in a recent interview with Platts, the head of Oil Gas UK said at $50, North Sea oil production could fall by 20%, dealing a hammer blow not just to the companies involved but to the Scottish economy as a whole.