Oil crash has far-reaching consequences

The slump in the price of oil is having far-reaching consequences for business and politics.

Brent crude, the international oil benchmark, was trading at $115 a barrel in June 2014, but it fell as low as $27 in January this year. It is now trading at about $40, but few who follow the energy industry expect it to go back above $100 soon.

As the Financial Times publishes a new series about the wide-ranging implications of the oil crash, below is a selection of the best writing on this subject in the FT during the past 18 months.

US shale under pressure

Workers connect drill bits and drill collars, used to extract natural petroleum, on Endeavor Energy Resources LP's Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas, U.S., on Friday, Dec. 12, 2014. Of all the booming U.S. oil regions set soaring by a drilling renaissance in shale rock, the Permian and Bakken basins are among the most vulnerable to oil prices that settled at $57.81 a barrel Dec. 12. With enough crude by some counts to exceed the reserves of Saudi Arabia, they’re also the most critical to the future of the U.S. shale boom. Photographer: Brittany Sowacke/Bloomberg
© Bloomberg

November 12 2014: If there is “price war” in the oil market, as Adel Abdul Mahdi, Iraq’s oil minister, has suggested, the US shale industry is refusing to take flight at the first sound of gunfire . . .

“[But] activity is already starting to slow. There were 1,568 rigs drilling for oil onshore in the US last week, 41 fewer than in mid-October … Debt has fuelled the shale boom … As prices fell, the companies that borrowed too much have started to find themselves under strain. The bond markets have already started to reflect some nervousness, with yields on junk bonds in the energy sector rising to their highest level in more than a year.” See full story

Saudi Arabia fights back

Saudi oil minister Ali al-Naimi © Barry Falls

March 9 2015: During periods of instability, the Saudis adjusted their production to restore balance. But [in 2014], as concerns about oversupply escalated, the kingdom changed tack and refused to act as the oil market’s safety net. Cutting output, Saudi Arabia believed, would only help its rivals — and it was time to take a stand . . .

Some suspected [the shift in Saudi oil policy] was rooted in geopolitics … But a close examination of Saudi actions suggests an unexpected series of global political events and — crucially — a misreading of the market were the driving forces behind Riyadh’s gamble. See full story

Perfect storm in the North Sea

February 25 2015: Ageing North Sea fields, already seen as a marginal bet from which the biggest oil companies have been retreating, look very vulnerable. Oil & Gas UK, which represents offshore operators, says a fifth of production, or a third of fields, is now unprofitable. Cash losses, or the deficit after subtracting costs from revenues, topped £5bn in 2014, the biggest shortfall since the 1970s.

This loss follows a long-term decline in production. Output on the UK continental shelf, despite record investment in recent years, has been sliding since 2000. See full story

Shell-BG mega deal

April 8 2015: There is no arguing that Shell’s move is bold. By acquiring [BG] its smaller rival, it will become the largest foreign oil company in Brazil, one of the world’s most highly prized oil provinces, and cement its position as the global leader in liquefied natural gas, the increasingly popular clean-burning fuel . . .

BG may have been on Shell’s radar screen for decades, but was long seen as too expensive a target. That all changed when the oil price started to slide [in 2014], dragging down the valuations of all the world’s energy companies, including BG. See full story

US shale in crisis

April 24 2015: [Juan] Ramos was brought to Williston, North Dakota, by perhaps the most important innovation of the 21st century: the technology for extracting oil from unyielding shale rocks. The Bakken formation, which runs underneath North Dakota and into Montana and southern Canada, is one of the largest oilfields opened up by that revolution. Along with similar oil-producing areas in Texas, it has transformed the outlook for US energy security, created hundreds of thousands of high-paying jobs and rattled the leaders of rival oil-producing countries from Riyadh to Caracas …

While the new oil industry is still in its infancy, though, it is facing its first real test. American producers have become victims of their own success. In the past nine months, the flood of new oil supply they created has caused a collapse in the price of crude … See full story

Canadian oil sands marginalised

June 16 2015: With the collapse in crude prices, energy companies have suspended or cancelled billions of dollars in new projects, thousands of workers have lost their jobs and voters ousted the party that ran the [Alberta] provincial government for 44 years …

The effects of cost cuts are starting to bite in the Fort McMurray region. At the airport, which opened a new C$258m terminal in June 2014, charter flights are discharging 30 per cent fewer passengers. More families are visiting the community food bank. And as a sympathetic gesture the Wood Buffalo Brewing Company reduced its price for pale ale to a tenth of the cost of a barrel of West Texas Intermediate crude. See full story

Petrobras reels from scandal, oil plunge

December 30 2015: Few large oil companies globally have disappointed investor expectations in recent years as badly as Petrobras. The company’s 2007 discoveries of “pre-salt” offshore oil reserves kicked off a flurry of industry excitement. [Run] by officials handpicked by Workers’ party-led governments, Petrobras moved to exploit the discoveries by embarking on the largest corporate capital expenditure programme in the world. The company also began a huge refinery building project.

But things went awry in 2014 when police launched the Lava Jato (Car Wash) investigation into allegations that former Petrobras directors collaborated with politicians and contractors to extract bribes from the company. See full story

Gazprom eyes gas price war

Production at ChelPipe Plant Ahead of IPO...An employee attaches an OAO Gazprom labelled end cap to a steel pipe manufactured by OAO Chelpipe (ChTPZ) at the Vysota tube rolling plant in Chelyabinsk, Russia, on Thursday, Feb. 10, 2011. ChelPipe, Russia's third-largest maker of steel pipes, postponed its initial public offering in London because of
© Bloomberg

February 3 2016: With the prospect of a wave of US liquefied natural gas supplies starting to hit the market later this year, energy investors fear Gazprom may adopt the same strategy in the gas market that Saudi Arabia has done in oil. It may seem like … the last thing that Russia, reeling from the impact of low oil prices, needs.

But analysts say that such a strategy may be economically rational for Gazprom … Such a move would have significant repercussions for the global energy markets: a fully-fledged price war in the European gas market could have a ripple effect across other regions and commodities — from Australian LNG to Colombian coal — as well as threatening the viability of the nascent US LNG industry. See full story

Emerging market producers hit hard

February 4 2016 Asked recently what kept her up at night, Christine Lagarde, managing director of the IMF, says she worries about the fate of low-income oil producers like Nigeria. “That’s a country that is facing, like many other oil-producing countries, a real hardship and a necessity to very promptly redesign its business model and realign its interests with a completely new reality which is here for longer than many think.”

The concerns at the IMF go beyond the effect on budgets and growth and fears over a balance of payments crisis. IMF economists warned this week that commodity price shocks could weaken banks in developing economies, raising the prospect of a commodity-driven financial crisis. See full story

Is the oil majors’ business model broke?

February 14 2016 When executives from the large oil companies talk about the industry downturn, they generally frame it as a temporary condition. Because crude at below $30 per barrel is much too low to incentivise investment, they say, the oversupply in the oil market will correct, and prices will rebound to levels that will allow them to make respectable returns again . . .

But what if they are wrong? Some economists argue that “nightfall is coming” for big oil companies, threatened on one side by the rise of renewable energy and climate policies that will curb the growth of fossil fuel demand, and on the other by the smaller, nimbler companies that lead the shale oil and gas industry. See full story

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