Because
. . .
The
world’s Oil Industry, has a history of booms and busts; it is currently (January 2016) in its deepest downturn since the 1990’s
if the current price is inflation adjusted.
Oil
production profits are down for companies that experienced record earnings in
recent years; this decline in revenue has resulted in decommissioning approximately
two-thirds of oil production rigs and has sharply cut investments in both exploration
and production. An estimated 250,000 oil workers have lost their jobs, and equipment
manufacturing for drilling and production has fallen severely.
While most citizens of the world regret individual
job losses in most any sector of the global economy; it is difficult at best
for many folks to sympathize, particularly with the big five oil companies (BP, Chevron, ConocoPhillips, Exxon Mobil, and Shell),
whose financial reports indicate that they raked-in a combined total of $93 Billion,
or $177,000 per minute in 2013. As
mindboggling as that might sound Big Oil’s profits in 2013— impressive by any
standard—were actually a 27% reduction in profits compared to 2012.
As is indicated by the graph below, oil prices
rebounded a few times last year (2015), but this
year (2016) a barrel of oil has already plummeted
well below the 2006 level. Experts think it will be years before oil returns to
$90 or $100 a barrel which has been pretty much the norm throughout the past 10
years.
The “because” behind the plunging prices
of a barrel of oil, which is more than 60 percent since the June 2014, is
simple: The economics of supply and demand.
On the latter side, the economies of Europe
and developing countries are weak and too, automobiles have for the past
several years have become more energy-efficient on both sides of the pond. So demand
for fuel is lagging a bit.
While on the supply side, production
in the United States crude oil production has nearly doubled since 2010, forcing
former oil importers into the U S from places like Saudi Arabia, Nigeria and
Algeria to find other buyers; suddenly they are competing for Asian markets,
and the producers are in turn forced to reduce prices. Canadian and Iraqi oil production and exports
are rising year after year and even the Russians, with all their economic woes,
manage to keep pumping & exporting oil. Finally, estimates are that Iran
has the technical capability to increase crude oil production by about 600,000
barrels per day by the end of 2016 as sanctions are lifted. Crude oil exports from
Iran are expected to rise by half-a-million barrels a day within just a few weeks.
Some have argued that the anticipated Iranian
production has forced crude prices down while others content that with Iran
re-entering the world market after being absent several years will force prices
even lower.
A more ridiculous argument for the drop in
crude oil prices includes, yep,
a conspiracy theory floating around. Even some oil executives are quietly suggesting
that the Saudis want to hurt Russia and Iran, as does the Obama administration; motivation enough, as the theory goes, for the two oil-producing nations (Saudi Arabia & the U S) to force down prices.
After all, the argument has been made that dropping oil prices in the 1980’s helped
bring down the Soviet Union.
However there is no real evidence to support a
conspiracy theory of any type; besides, Saudi Arabia and the United States
rarely coordinate well.
There are signs, however, that production is
falling in the United States and some other oil-producing countries because of
the drop in exploration investments. Never-the-less the drop in production is
not happening fast enough to force an immediate price drop, in large part,
because of U S productivity from deep waters off the Gulf of Mexico; plus Canadian
production is continuing to grow as new projects come online.
So when are oil prices likely to recover? The
short answer is “not anytime soon”. Oil production / supply are simply not
declining fast enough; though that could begin to gradually change this year (2016). Then too, demand for fuels are in the early
stages of recovery in a few countries, and that could help crude prices recover
within the next year or if we’re lucky maybe two.
Sources:
http://www.bloomberg.com/news/articles/2016-01-13/iran-sanctions-seen-lifted-by-monday-as-nuclear-deal-implemented
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