How Plunging Oil Prices Affect World Business

The current oil rout is the worst since 1970, with the price of oil slumping from $115 a barrel in

This guest article was written by Ronnie Chopra who is the Managing Director, City Trading Academy

 

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Global oil prices have slumped over the last couple of years which has caused much distress to many energy exporting countries.

The current oil rout is now worse than any since 1970, with the price of oil slumping from $115 a barrel in the summer of 2014 to the current price, approximately $30 a barrel. The all-time peak price of oil was in July 2008 when the price reached $145 a barrel.

From 2010 until 2014 world oil prices were fairly stable at around $110 a barrel but today oil is trading at around $30 a barrel. With oil prices at a 12-year low the impact has been very severe on many countries.

Ronnie Chopra
Ronnie Chopra

The diving oil price has already had a devastating effect on the North Sea industry with an estimated 65,000 jobs lost in the past 18 months, approximately 15 percent of the total UK oil and gas workforce. The carnage looks set to get even worse as oil companies abandon projects which will result in more job losses as the price stays so low.

There is so much oversupply globally that countries are running out of storage

The main reasons for the low oil price are that weak global economic growth has reduced demand and production has surged in the US. US energy production, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, has been one of the main drivers of lower oil prices.  The advent of shale gas investment in the US has boosted production considerably. US domestic production has nearly doubled since 2008 pushing out oil imports. Saudi Arabian, Nigerian and Algerian oil that once was sold in the United States is competing for other markets. Due to the increase in US production, America’s share of global production has increased from 10% to 16% since 2008.

The return of Iran on to the global export market and increases in output from Russia and Saudi Arabia will keep excess supply at approximately two million barrels a day until March.

There is simply too much supply and too little demand at the moment. China’s economic slowdown has curbed appetite for oil as has weakness in emerging markets. Saudi Arabia, which produces a third of OPEC’s output, is keener on preserving its market share than it is on cutting production to boost prices. Tensions between Iran and Saudi Arabia confirms the view that Saudi Arabia is unlikely to cut its output to help Iran regain market share.

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There is so much oversupply globally that countries are running out of storage. US stockpiles are at their highest level in at least 80 years.

At current prices, producers around the world are having to sell at a loss and even where they are not, such as in the Middle East, government budgets have been adversely affected. However, many Middle East countries are still able to make a profit at $30 barrel as cost of oil production is approximately $10 a barrel. However, their revenues are far less with the price of oil at multi-year lows. In the US, cost of production ranges between $30-$70 a barrel.

Russia is one of the world’s largest oil producers with oil and gas accounting for 70% of export income. Russia loses approximately $2 billion in revenues for every dollar fall in the price of oil. Russia’s economy has recently recorded its steepest decline in gross domestic product since 2009 as the slumping oil price takes its toll.

Saudi Arabia, the world’s largest oil exporter, unveiled a record budget deficit of $98 billion last year. The kingdom is running a budget deficit equivalent to 15% of GDP. They have responded to the shortfall in revenues by slashing public spending and subsidies.

Oil producing countries such as Brazil, Nigeria, Russia and Venezuela are a few of the countries that are suffering economic turbulence.

The diving oil price has already had a devastating effect on the North Sea industry

The drop in oil prices has caused a $50 billion cut to Canada’s national income, equivalent to $1,500 per year for each person. In Alberta, 40,000 jobs were lost in 2015 due to the slump in oil prices and 2016 will no doubt bring even more layoffs.

Low oil prices are posing a risk to the US economy as prices are putting pressure on the oil sector. Bankruptcies in the sector in the second half last year exceeded the levels witnessed during the financial crisis. When oil prices were high, lots of banks made loans to energy companies to finance drilling and now some of these oil companies are having difficulty in re-paying them. Banks are making greater provisions for losses on loans in the energy sector.

The sharp oil price is also forcing the massive sovereign wealth funds (such as the Saudi Arabia fund), which are backed by oil money, to pull out some of their funds from financial markets in order to address budget problems in their home countries.

This withdrawal from funds is having a noticeable effect on global stock markets which are trading at multi-year lows.

 

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