Energy Market Research: Oil Prices Continue Sliding

Well, Well, Well … Oil Prices Continue Sliding

Over the past several months, global oil prices have plummeted, causing revenue problems for nations which export energy. Correspondingly, people in countries that import oil have enjoyed lower prices at the pump and are paying less to heat their homes this winter.

Since June of 2014, oil prices have nosedived, dipping under $50 a barrel for the first time since 2009. Rapidly increasing US oil production and weak international economic growth are behind this recent trend. Additionally, OPEC nations are not slowing production; a tactic which would ordinarily inflate prices.

Energy in Russia

Russia, where gas and oil revenues supply 70% of income derived from exports, has been particularly hard hit. The rouble is at record lows while inflation has hit 8 percent and interest rates have risen to 17%, hurting the country even more than Western sanctions imposed due to Russia’s incursions into Ukraine. It is anticipated that Russia will slide deeper into recession in 2015.

Oil in Saudi Arabia

Saudi Arabia could slow production and cause prices for crude to rise, but they aren’t inclined to do so, since Iran and Russia would benefit. They also have an estimated $900 billion in reserve. Iran and Syria have their own geopolitical problems and regimes to keep propped-up. It’s thought that economic downturns might make Iran more receptive to scaling back nuclear development efforts. The rise of the Islamic State has added new wrinkles of complexity with ISIS seizing wells and selling an estimated $3 million of discounted oil a day on the black market. OPEC member Nigeria is feeling the heat of US competition. The African nation draws 80% of its revenue from energy sales. 

Energy in the United States

While the United States is now the largest oil producing nation in the world, Fracking interests are heavily leveraged and are depending on higher prices in order for them to be profitable. Though oil production is as high as it’s been in 30 years, permit applications for new wells dipped 15% recently. This is the first sign of a downturn and revenue growth is expected to be clipped by 30% this year. Deep water drillers in the Arctic and the North Sea also depend on higher oil prices to support increasingly expensive extraction efforts. Astoundingly, Halliburton is down 44% in value in the last 6-months. BP is down 25% and Continental Resources, a major shale interest in North Dakota, has forfeited half of its value. Political infighting still persists over Canadian oil sands and the proposed Keystone Pipeline. The affect of present oil prices on that project’s progress remain to be seen.

How low can oil go?

Motorists in the US would save $230 billion if prices stay as they are for a year, and that money is sure re-enter the economy. Companies like Delta Airlines have already saved $40 million on cheaper jet fuel. OPEC is taking it on the chin to the tune of $590 billion, and that’s money that will remain in Japan, China, and the US, pushing the global economy a full percent higher. No one doubts that lower oil prices will promote consumer spending. The negative flipside; investors stop investing when oil is down. All told, oil producers will lose $1.5 trillion in revenue if present prices persist.

Oil in Latin America

Venezuela is a huge world oil exporter and an economic disaster. With near 60% inflation, recession seems all but inevitable. Venezuela’s economic problems are exacerbated by expensive social programs, price controls, and fuel subsidies.

High Oil Demand in Asia

In Asia, China is on course to become the world’s biggest oil importer. The benefits of low-priced oil could be offset, however, by a general economic slowdown there. Meanwhile, Japan relies on outside sources for its oil, and low prices will help to accelerate inflation. This plays into Prime Minister Shinzo Abe’s strategy to offset deflation. India needs a lot of outside oil. Declining prices will help with account deficits and promote falling fuel subsidies.

Some say, “It can’t last,” and perhaps low oil prices will rise again soon. For now, the emergence of the US as the world’s major oil producer and the ramifications and echoes of that reality have changed the game. Where it will lead? Only time will tell. Oil is a slippery thing to manage.