The Rise And Fall Of Big Oil

Liquid-Gold--

A movement of a single digit on the graph is enough to send the global economy into a tail spin. Wars have been fought (and continue to be fought) over what has now famously been called liquid gold. Crude oil, the basis of modern day world economy, has proven to be a commodity strong enough to give nightmares to the brave.

Crude oil prices, over the last 15 years have seen an all-time high of approx. $145 a barrel (June, 2008) and an all-time low of approx. $25.96 (Dec. 2001). As of January, 2016, Crude oil prices (at US $29.42) are threatening to set a new record low. (Data sourced from here)

While low prices may seem more beneficial to the overall economy, the actual problem starts with the amount of money needed to be invested for exploration and production. Companies invest billions to develop oil fields for active production, money which has been borrowed by banks and which can only be realised if the oil produced is sold at a price higher than the cost of production. While this wasn’t much of a problem with high crude oil prices; it is a cause of concern when breaking even for the oil companies becomes a distant dream.

On the financial side, theoretically, banks which have lent money to the energy producers (major oil exploration and production companies) would recover the money from the energy consumers (heavy industries, road transport, petrochemical, energy production etc.). In reality, most of these loans from banks are concentrated, which limits the recovery factor and even puts the banks in a perilous position, especially with the latest price trends.

Cause

  • With shale gas in increasing use in the United States making them nearly self-sufficient in terms of energy consumption, it has had a deeply negative impact on the oil economy. With the USA relying more on domestic shale gas production, Saudi Arabia, one of the closest US allies has made moves to increase production levels to such highs causing significant reduction to crude oil prices in a bid to make it more appealing than shale gas. While the rest of OPEC may or may not agree, Saudi has the capacity, both financial and infrastructural to survive these lean times. After decades of close ties with the United States, some would argue that their economy is saturated enough to take the former on the economic battlefield.
  • Lifting of economic sanctions on Iran, placed by the US in 1995 following strained diplomatic ties has led to more business opportunities. With an update to their Proven Reserves Table, access to open markets and the need for funds for development has brought the Muslim nation back into the fray of international finance with production going into full swing.
  • Economies in the US and Europe, which have accounted for up to 40% of the global crude oil production have begun to saturate. With the recent recession and plateau in terms of expansion opportunities, the demand is no longer keeping up with the supply.
  • Growing economies, like China, who supply the European and American markets, are slowing down. Consuming a tenth of world production, China is slowly shifting focus nearer home, with increasing amounts of products being released into the Indian market being sourced from there. While this seems to be working for the present time, Indian manufacturing is taking a hit, with recent updates showing a decrease in the sector.

India imports over 75% of its requirement for crude oil. While alternate fuels have been suggested to reduce the dependence on imports, the size of the market, both in terms of numbers and finances, make this change unviable. While a part of the import bill (approx. US $150 Million per day) is recovered with the refining and export of such products, a comfortable growth target will require more such imports. With the falling value of the rupee against the dollar (Rs. 67.79 to US $1), Indian oil companies expect a bump in profits. But the unstable nature exchange rates doesn’t allow this to last either.

Global politics indicate the global glut of oil will not end soon. Internal consideration in some of the Arab countries indicate that they are beginning to feel the shortage of funds, especially with active conflicts in various areas. The need of the hour is a push to answer the energy requirement with a solution.

Some have even suggested a systematic shift of industries to an alternate fuel, such as natural gas. Found in abundance, money to effect the changeover has and continues to be a limiting factor.

A growing population is also a growing market; and India still remains one of the largest untapped markets in the modern world. While growth expectations are spoken about with pride, it is time to take a serious look into how we will, as a country, continue to power that growth in the coming decades where we are expected to take leadership position on the world stage.

Ranveer Raj Bhatnagar

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