The Downward Trend of the Oil Industry

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The recent downturn in crude oil prices will as usual have the greatest immediate impact on the exploration segment of the industry. Coincident with that will be a decline in sales and manufacture of oil and gas equipment.

The next segment of the industry to feel the pressure of the price decline will be the oil and gas services. The price of oil, or the oil price is generally refers to as the spot price of a barrel of benchmark crude oil. The price of a barrel of oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location. As with all commodities, the oil price is determined by the balance between supply and demand. The supply of oil is dependent on geological discovery, the legal and tax framework for oil extraction, the cost of extraction, the availability and cost of technology for extraction, and the political situation in oil-producing countries. Both domestic political instability in oil producing countries and conflicts with other countries can destabilize the oil price. For example, the Iranian Revolution of 1979 led to a jump in oil prices “Mouawad, Jad (2008-03-08)”. The demand for oil is dependent on global macroeconomic conditions. According to the International Energy Agency, high oil prices generally have a large negative impact on global economic growth.

The Paradox of 2016 and the Long Term View

The long term view is much the same, since 1869 US crude oil prices adjusted for inflation have averaged $18.63 per barrel. Fifty percent of the time prices were below $14.91. If long term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate, hopefully with a profit, below $15.00 per barrel half of the time. Predating the outcome of Oil Price of 2016 as 2015 was drawing down closer, the oilfield services analyst and managing director of Credit Suisse James K. Wicklund said with conviction 2016 was already in the trash can. He said “it’s going to be a terrible year” for oil and natural gas production, specifically offshore. Reflecting on the closing keynote at the recent Gulf of Mexico Offshore Executive Conference Wicklund said that 2016 was going to be the first time since the 1980s that capex would be down two years in a row, and he could only hope that it does not extend into 2017 and 2018 for the offshore sector. Researcher emphasized that the industry routinely goes through cycles of high and low prices, and that according to recent Goldman Sachs data, oil prices will hit bottom again, for a third time, before the end of this year. Many E&Ps invested in their fields when the price of Brent was $115 and the price of WTI was $100 but now it’s the contrary and emerging states like Liberia that depends on data sale will soon begin to struggle and might vanish in air if the price of oil continue drop.

What’s the future and how low can oil prices go?

Many predictors and actors believed that oil price would have increase months before the 2016; however, an American investor warned that any panic in the market could drive oil prices down to new low records. He further mentioned that some people were saying 20 dollars a barrel but he finally said I don’t know; that’s not my prediction. We can now say to emerging states ‘be prepared’ if things will go at least for a short time, lower than anybody could conceive. Without providing any definite time frame, Rogers predicted that oil prices will go “much, much higher sometime later, especially in the event of war, in which case they would go up very high soon.” The outbreak of war notwithstanding, oil prices can be expected to jump in the future because, as Rogers explains it, “drilling is drying up.” It’s simply becoming too expensive as oil prices plummet for many companies to stay in business. They are definitely going to go up in the next few years because supply is going to dry up. Drilling is drying up; everything is drying up, and so you’re going to have much higher oil prices in the future.”

Oil prices fell for a sixth session to trade near 12-year lows on weeks ago as concerns about China’s economic slowdown, reflected in a renewed slide in its stock markets, weighed on the outlook for demand this year.

Traders increased bets against any near-term recovery in the oil price and Brent crude futures were down 82 cents on the day at $32.73 a barrel by 1500 GMT, having fallen by 15 percent in the space of a week. U.S. West Texas Intermediate (WTI) crude futures were down 71 cents at $32.45. Meanwhile, speculators increased their net short positions to a record high in weeks ago, data showed in the chart above, is a sign that they are losing faith in a price rise anytime soon. Analysts pointed to China’s economic slowdown, which has seen the Yuan weaken and two emergency suspensions in Chinese equity markets last week, as the main reasons for lower oil and commodity prices.

Are we heading to where we came from?

With the continue drop in oil price many forecasters wondering over the oil price reversion to its genesis, Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 1996 dollars an entirely different story emerges and in 1996 dollars crude oil prices fluctuated between $14 and $16 during the same period, the apparent price increases were just keeping up with inflation. From 1958 to 1970 prices were stable at about $3.00 per barrel, but in real terms the price of crude oil declined from above $15 to below $12 per barrel. The decline in the price of crude when adjusted for inflation was further exacerbated in 1971 and 1972 by the weakness of the US dollar. OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. These nations had experienced a decline in the real value of their product since foundation of the Organization of Petroleum Exporting Countries (OPEC). Throughout the post war period exporting countries found increasing demand for their crude oil and a 40% decline in the purchasing power of a barrel of crude. In March 1971, the balance of power shifted, that month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC.

Chinese, metals and the oil price

It well understood that China which depends on oil to keep the wheels of its massive economy churning out exports is watching the developments between Saudi Arabia and Iran with great interest. However, if Iran and Saudi Arabia start a war, that’s going to be very bad for everybody and China needs a lot of oil. So of course China has a connection and wants to do something about it to keep things calm so they can continue to get oil.

Although low oil prices may be a boon for some countries, like China and Germany, it’s bad for oil-producers, like Venezuela, Russia and Saudi Arabia and emerging states like Liberia and Ghana. However, since China remains largely neutral in the ongoing skirmishes that are continuing to rock the Middle East, it may hold the key to resolving many of the region’s most trenchant problems.

China certainly does not want a war to erupt between Iran and Saudi Arabia, and China is seen as much more neutral than anybody else. America is not neutral; the Europeans are not seen as neutral. If anybody can calm things down it’s probably China. “Rogers 2015”. Miners have been through this cycle several times. A decline in investment and exploration budgets in the mid- to late 1990s led to a falloff in the supply of many metals in the latter part of the last decade. That contributed to a sharp metal-price run-up at the time, which led in turn to the opening of new mines that would later flood the market with metal once again. There are, of course, alternative scenarios in which prices continue to languish at low levels. Demand for crude could falter, especially if China’s economy remains sluggish. Weak data in recent months has sparked concern about the health of the world’s second-largest oil consumer.

The future of emerging states and the excesses of the past

We are now paying for the excesses of the past and everything is going to go down more than it should “Jim Rogers US investor and author”. Meanwhile, China may play a key role in the showdown between Saudi Arabia and Iran, Rogers added. This week, crude fell to its lowest level in more than 11 years, while Iranian outrage over Saudi Arabia’s execution of a prominent Shiite cleric spells doom for any possible production cap deal that would have reversed the negative trend in oil prices. Global Brent crude benchmarks hit below $30.00 a barrel on Monday down the lowest since 2004. Businessman Jim Rogers sees the steep downward trend in oil prices as reflective of severe financial problems in the global economy that began almost a decade ago with the US financial crisis. Oil and Gas Whizzes believed that we’re going to pay for the prices of the excesses of the past 8 or 10 years and everything is going to go down more than it should. Whenever you have something go down, it usually overshoots to the down side; just like when things go up they go up too much. Many analysts expect a price recovery towards the end of 2016 to pull up the average for the full year, with production especially in the United States falling as drillers succumb to debt and low revenues.

However, traders say analysts based their outlooks for 2015 on similar reasoning and are calling it wrong again for 2016, with oil producers cutting costs to both survive over the long haul and keep pumping oil at low prices to service debt. Policy responses to lower oil prices, which are still being formulated in many countries, will depend on a complex set of factors. These include, for example, the size and direction of the terms-of-trade shock, the exchange rate regime, fiscal and external buffers, balance sheet mismatches, exchange rate valuation, the output gap, and inflation. To organize ideas, we propose a flexible policy framework to determine the appropriate mix of adjustment of fiscal, monetary, and exchange rate policies. The framework to improve and safe emerging states in oil and gas industry is clarity presented in my next article.

About the Author
Vicent S.T. Willie, II, – is a Liberian intellectual, academician and an activist who believe in the theory of social justice, equal opportunity and academic freedom. He is a graduate of the African Methodist Episcopal University (AMEU) with a bachelor of science (BSc) degree in Economic and Political Science, Postgraduate Diploma (PGd) in Strategy Management, London School of Business and Finance, UK; Postgraduate Diploma Contract Management and Compliance Tools – Taxes Southern University and Master of Science (MSc) in International Oil and Gas Management – Centre for Energy, Petroleum, Mineral Law and Policy (CEPMLP), University of Dundee, UK. Contact: [email protected]

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