- July 11, 2016
- Posted by: Admin 2
- Category: Analytics
Many oil and gas producers have been badly jammed since the slip in global oil prices from 2014, leading several of the firms to restructuring, refinancing and cost-cutting of business operations, often through asset disposals and layoffs. Some of the leaders in oil and gas industry say, though they see business projections picking up in time, a near-term recovery seems challenging given the determinedly low oil prices, around $30 a barrel since the start of 2016.
Upstream oil and gas companies have reacted to the market depression by cutting their exploration and production (E&P) expenditure for two succeeding years. It is estimated that about $600 billion worth of works or projects have either been cancelled or put off including deep water project sanctions. This in turn will significantly lessen the work for offshore companies at the moment. If the low oil price continues, global economy will be affected more strongly as oil is the lifeblood of many economies.
DIFFERENT COUNTTRIES RESPONDING TO CRISIS
US has the largest oil reserve in the entire World. Dropping oil prices is never a crisis to them. Shale has fundamentally severed the connection between geopolitical chaos in the Middle East, and oil price and equities since oil and gas is mined from shale formations using hydraulic fracturing or fracking, which is one of the main drivers of lower oil prices. Even though many US shale oil producers have far higher costs than conventional competitors, many need to continue pumping to generate at least some revenue stream to repay debts and other costs.
Venezuela in South America, is one of the world’s chief oil exporters. It was already finding it difficult to pay its way even before the oil price started falling. Inflation is running at about 60% and the economy is teetering on the brink of recession. The need for spending cuts is clear, but the government faces difficult choices. The country already has some of the world’s cheapest petrol prices – fuel subsidies cost about $12.5bn a year – but the current President Maduro has canceled subsidy cuts and higher petrol prices.
Gulf producers such as the UAE and Kuwait have also accumulated huge foreign currency reserves, which means that they could run shortfalls forseveral years. Other OPEC members such as Iran, Iraq and Nigeria, with superior domestic financial demands because of their large population sizes in relation to their oil revenues, have less room for any operation. They have mutual foreign currency reserves of less than $200bn, and are already under pressure from increased US competition.
Russian economy greatly depends on energy revenues, with oil and gas accounting for 70% of export incomes. Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has cautioned that Russia’s economy would shrink by at least 0.7% in 2015 if oil prices do not improve. Despite this, Russia has confirmed that it will not cut production to shore up oil prices.
It openly announces that they have not recovered from the crisis of 2008, therefore, abandoning a number of programs and making certain sacrifices seems to be the only solution now. Russia’s interest rate rise may also bring its own problems, as high rates can obstruct economic growth by making it harder for businesses to borrow and spend.
With Europe‘s fading economies characterized by low inflation and weak growth, any benefits of lower prices would be welcomed by the longsuffering government. They say a 10% fall in oil prices should lead to a 0.1% increase in economic output. Now with Brexit in place, drop in oil prices is not going to be reflected in the UK economy. In general, consumers benefit through lower energy prices, but eventually low oil prices do wear away the conditions that brought them about.
Saudi Arabia, World’s largest oil exporter and OPEC’s most dominant member, could support global oil prices by cutting back its own production. Although Saudi Arabia needs oil prices to be around $85 in the longer term, it has deep pockets with a reserve fund of some $700bn – so it seems it can survive lower prices for some time.
In terms of production and pricing of oil by Middle East producers, they are beginning to spot the challenge of US production. If a period of lower prices were to force some higher cost producers to shut down, then Riyadh, capital of Saudi Arabia, might hope to pick up market share in the longer run. However, Riyadh’s unwillingness to cut production is a result of what happened in 1980s, the country did cut production significantly in an attempt to lift prices, but it had little effect and it also severely affected the Saudi economy.
India imports 75% of its oil, and analysts say dropping oil prices will comfort its current account deficit. At the same time, the cost of India’s fuel subsidies could drop by $2.5bn this year – but only if oil prices stay low.
Nigeria, Africa‘s biggest oil producer, has seen progress in the rest of its economy but regardless of this it remains greatly oil-dependent. Energy sales account for up to 80% of all government revenue and more than 90% of the country’s exports.
China, which is set to become the major net importer of oil, should benefit from falling prices. However, lower oil prices won’t fully counterbalance the far wider effects of a slowing economy.
Japan imports nearly all of the oil it uses. But lower prices are a boon as well as a ban because high energy prices has lent a hand to push inflation higher, which is Japan’s growth strategy to fight deflation
WHO BENEFITS FROM THE CRISIS?
Transportation – Transportation industry also benefits from lower oil costs since fuel costs are a significant expense for those industries.
Households – Household market is poised to benefit from low oil prices since it is four to five times more energy-intensive than manufacturing.
Housing Markets – For consumers not in [oil-producing] parts of the country, low oil prices are a bit of a benefit because it gives them more spending power on housing market
People – An increasing fraction of consumers will decide to pocket that saving and pay down debt, rather than splurging on household gadgets or luxury vacations. Therefore, families will also be long- term winners from the crude price fall. Parents now rate financial security over comfort spending.
Automobiles – Low oil prices means that consumers will opt for larger and more expensive vehicles (like SUVs and trucks) over smaller, fuel-efficient models.
Oil markets, as said by some analysts, is said to rebound considerably. And over the long term, demand for fuels will recover in some countries, which could help crude prices recover in many years to come.