Global oil prices are spinning out of
control. Prices came under intense downward pressure as global output of crude
oil outstripped demand, especially this year. The global benchmark, Brent crude
oil fell below $70 per barrel, it’s lowest level since 2010.
What caused oil prices to rise to such
unprecedented high levels?
You have to go back about nine years ago, to
the mid 2000s when oil prices rose steeply owing to the unprecedented global
demand caused by China’s meteoric rise. China with a GDP of $17.6 trillion is
now the world’s largest economy, putting the United States in second place for
the first time in 142 years.
The surge in China’s economic output and energy
demand led to a large price spike, with Brent crude price holding steady at
over $100 per barrel over the last four years. With what looked like a
sustained surge in global crude prices, energy companies were persuaded going
after tight oil would be immensely profitable.
Why are crude oil prices plummeting today?
The slowing down in global demand has
triggered the inexorable decline in world crude market prices. This is due the
slowing Asian economies and chronically slow and deteriorating European Union
economies.
Asian economies are slowing down as fallout
from “re-balancing” in China. China’s re-balancing will require lowering
investment levels, increasing household consumption, which must grow faster
than GDP, and reducing the role of the state sector. Several new reports
indicate that the European economy is stagnating and is at risk of a
deflationary spiral. The European Central Bank has downgraded growth in the euro
zone to just 1 percent in 2014. The core of Europe, Germany and France, is in
recession.
Another demand-supply influencing factor is
the US domestic crude oil production. Domestic crude oil production levels have
increased since prices spiked in 2008, exceeding net imports in 2011.
And what has been the global response, if
any?
Organization of Petroleum Exporting Countries
(OPEC) – a cartel of oil producers that includes Saudi Arabia, Iran, Iraq, and
Venezuela – met in Vienna last week with the expectation that it would cut
petroleum production to forestall the plunge in oil prices. It did not; a sign that
OPEC influence in the global oil market is diminishing or we have entered an
era or crude price wars.
Is OPEC instigating a price war with other
oil producers, notably the United States, Russia and Brazil? Will OPEC allow
global oil prices to continue falling in the hope that many of the newest
exploration and drilling operations will prove unprofitable and shut down?
US companies are using horizontal drilling hydraulic
fracturing to extract oil from shale formation, techniques that are more
expensive than pumping oil from conventional reservoirs. Is that why Abdalla
El-Badri, OPEC secretary general, says the best cause of action is to do
nothing; just wait and see how the market behaves, hoping that lower prices
will discourage domestic production in places like the United States?
But more importantly, how does the plunge in crude
oil price affect us here in Kenya?
Falling
petroleum prices will benefit Kenyan consumers and the overall economy. The
cost electricity and transportation will drop markedly, causing higher
consumption of oil products. Moreover, manufactures will reward consumers with
lower prices, lowering inflation and spurring spending. However, in the short
term, a glut in crude oil will slow down investments in renewable, clean energy
such as wind and geothermal. Increased energy consumption is bad for our
climate. It means higher greenhouse gas emissions.
Substantial and pro-longed decline in crude
oil prices pauses huge risks for Tullow Oil. Plummeting oil prices could reduce
its operating cash flow, reduce the value of its assets and cause development
plans to stall. Falling oil prices could compound other risks Tullow already faces,
such as long spells of unsuccessful exploration wells, political uncertainty
and shifting fiscal and regulatory terrain in all three of the African
countries it operates in.
What if OPEC is determined to decimate new
investments in places like the US, Canada and Africa by allowing crude prices
to fall below $75 per barrel? With crude oil prices in near free fall, can an
exploration-focused company like Tullow survive? Will shareholders run for the
hills?
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