A pro-longed period of low oil prices could have long-term consequences for the future of the oil industry and geopolitical stability of some oil exporting countries.
Falling oil prices can be a blessing and a curse at the same time. While low energy prices undoubtedly benefit the US economy overall, the country’s until recently booming oil sector is feeling a strong pinch from the low oil prices. The fall in the US shale sector was predictable already in late 2014 when OPEC’s decision not to cut its production target of 30 million barrels per day (mb/d) accelerated the downward trend in global oil markets and slashed the oil price by more than 55%.
The two most important questions hovering around the future of the US shale sector at the moment concern where oil prices will move in the next six to twelve months, and how low prices can go before overall US production becomes unsustainable. The common wisdom is that shale oil production is more expensive compared to conventional production, and at the moment the breakeven price for most US shale oilfields spans between $35 and $70 per barrel.
This has already started to take effect in the US shale sector, with companies reducing the number of rigs and capital spending in the country’s most productive areas: the Permian Basin, Bakken Shale and Eagle Ford. However, the sensitivity of the US shale sector to price volatility is absorbed by its flexibility. Unlike time-consuming and billion-dollar conventional oil projects, the shale industry has the ability to adapt quickly to market conditions.
The continuous period of low oil prices will nevertheless bring about a notable slowdown in the US shale sector, with the number of rigs expected to decrease by 30%, but this is unlikely to permanently damage the industry, as production can be restarted at a fast pace once oil prices rebound. In addition, according to the US Energy Information Administration (EIA), US oil production will continue to rise in 2015 and 2016 despite the price shock.
However, with current market conditions, the period of low oil prices could last longer than expected. The future price of oil will depend equally on the strength of the global economy and supply trends. At the moment the sluggish global demand, and the 1 million barrels per day oil glut, continue to exert downward price pressure on oil markets.
With OPEC continuing to flood the markets with oil, the greatest fall in oil production will be felt in the non-OPEC countries, where the production is expected to fall by 350.000 barrels per day. According to the International Energy Agency (IEA), this drop in production is expected in Colombia, Russia and the US.
On the other hand, production in OPEC countries is actually rising, as some countries are aiming to offset falling oil revenues with higher production. This is particularly obvious with Iraq, where production is expected to rise by an additional 550,000 barrels per day, which will more than offset the potential drop in non-OPEC countries, and thus create the foundation for a prolonged period of lower prices. In addition, Saudi Arabia has already indicated that it has no intentions of reducing production as this would inevitably affect its global market share.
This will have profound consequences for both the global oil industry and the geopolitical stability of some of the major oil exporters. Oil producers are already putting expensive and time-consuming projects on hold until prices rebound, and the oil dependent economies such as Venezuela, Russia, Iraq and Iran are having increasing difficulties in plugging their fiscal deficits.
Such a situation could potentially create a vicious cocktail of geopolitical instability and a lack of investment in the oil sector that could eventually result in a sharp rise in oil prices of up to $200 per barrel, as the CEOs of Total and ENI warned recently in Davos.
