The Year the Oil Bubble Burst
As companies are forced to slash value of reserves, industry faces a grim new future.
The days of artificially inflated oil prices might be over forever. Teardrop image via Shutterstock.
Let’s start with the big picture. Global oil reserves are estimated at 1.7 trillion barrels.
Energy companies treat their share of these reserves as the equivalent of money in the bank and report them as assets.
Back in 2014, oil was worth about $110 per barrel. Now it hovers around $40. That means that about $120 trillion in global assets have just disappeared, at least until oil prices rise again.
And that’s not likely to happen anytime soon — or perhaps ever. Much ink has been spilled trying to explain the reasons for the global price collapse. The short answer is that Saudi Arabia is weary of cutting production to prop up prices and ceding market share to new entrants like U.S. shale gas and Alberta oilsands.
Saudi oil minister Ali al-Naimi said as much to a horrified meeting of U.S. petroleum executives in Texas in February. Keeping prices artificially high by limiting oil production has just allowed competitors to bring higher-cost gas and oil to market, he said. “Cutting low cost production to subsidize higher cost supplies only delays an inevitable reckoning,” he said. Low prices mean “inefficient, uneconomic producers” will shut down, he predicted.
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