Lower Oil Prices Are Shaking the World
The long-term effects will echo for a decade or more.
Oil prices fell by over half from June 2014 to January 2015 (Brent: $110 to $50), then another one-third since (to $35). Natural gas and coal prices have also plunged, partially due to the same forces but also from substitution.
These are the results from a modest slowing of demand growth and — more importantly — the decision of the Saudi Princes to wage the first financial waragainst next-gen oil producers, those that tap oil sands, shale fields, and deep ocean deposits.
This is how Bloomberg put it:
Saudi Arabia won’t be satisfied with another temporary rebound in oil prices, such as the one that occurred last spring: Their U.S. competitors would just increase output again. They must inflict permanent damage by demonstrating to investors that with shale, they can’t bet on any kind of predictable return.
This will not end quickly; the list of casualties will be long. Goldman found $1 trillion in “stranded” or “zombie” investments in oil fields — a year ago at $70 oil. At $35 oil the total would be much larger.
The end will come with the bankruptcy or restructuring of many next-gen oil corporations, followed by a newly empowered (and perhaps expanded) OPEC cutting production to bring spare capacity back to average (3 or 4 million b/day) — providing a valuable production cushion for the world economy’s supply of this vital input. The long-term effects will echo for a decade or more: a higher cost of capital for and depressed risk-taking in the petroleum and coal industries.
The bond market has already begun to price in the coming bankruptcies of oil and natural gas Exploration and Production companies. But the geopolitical implications remain largely unexplored.
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