By Simon Trevezas
It has been a year since the first crisis burst in crude oil prices and nothing radical seems to change in Oil Industry to shift the conditions. Although, it is pleasant to decrease domestic expenditures by reducing oil prices, everybody has realized that this does not lead to an economic robust. Recently, Bloomberg calculated 100.000 jobs cuts (in oil industry) within the first quarter of 2015 and much more are about to be lost. This precariousness was enhanced by the abandonment of huge investment plans of the greatest companies which also led the governments to abandon every thought for future growth. The global economy seems to shrink every day and every action made does not look like a leap forward but a totter backwards.
More problems will occur by the constantly increased debt caused by the countries who are not able to produce products anymore and turn on loans to cover their needs. It is important to understand that a country measures profitability by the power of their own currency in comparison with the foreign currencies. If the cost of money is low then the expenditures of producing a product will overcome the profits and therefore it will become cost ineffective. For that reasons the nations have created the IMF (and some others financial organizations) to provide loans to all strangling economies with high interest rates and supervision. The current concession obviously is the cause for social turmoil (unemployment, bankruptcy, etc.) with tremendous impact on the every state apparatus. The ultimate objective is to realise the problem and try to solve it.
Key points which explain the oil price stability
1. OPEC is an international organization of oil producing nations and its main role is to control the production and eventually the price of crude oil. Although, it is clear that if the production decline the price will increase, Saudi Arabia denies to follow this direction and keeps on producing oil. This is because Saudi Arabia can be profitable even when the oil price is below $60 USD/bbl and probably wants to sell cheap oil to the Americans in order to delay their forthcoming energy independence due to the unconventional sources.
2. Another fact is that the recent invasion of Russia to Ukraine triggered a series of situations in order to punish Russia for its aggression and even more for the veto concerning the Syrian problem. Europeans stopped supplying gas by the Russians and also embargo to all their products and the Americans influenced all economic cycles to keep the oil prices low because it is well known that the Russians are relied on oil and gas exports in order to hold a strong economy. The Russians replied by increasing their production to counterpoise the losses.
3. The advanced technological equipment and the scientific personnel that US possesses has given the ability of producing hydrocarbons by unconventional resources, which are very costly and require high oil prices. None the less, US produces 9.5 mmbpd from these sources when Saudi Arabia produces 11.5 mmbpd from conventional sources. As a result, the increased oil production causes lifts up in oil availability in the markets when there is few demand for it.
4. In addition, Iran has finally signed an agreement (April 2015) with the G8 countries in order to end their nuclear program and terminate the long period of sanctions (since 2012). Iran is also an exporting country that produces around 2 mmbpd and since the sanctions begun is storing this quantities on board tankers and other storage facilities which nowadays overcome 30 mmb that are searching for buyers. Moreover, if Iran decides to increase production, to catch up the losses, then the world will be facing a much more difficult reality.
5. Since 1992, when the United Nations Conference on Environment and Development has decided to reduce CO2 emissions and stabilize the greenhouse effect, few things has been accomplished. Green energy although is gaining every year bigger market share (2% of global energy consumption) and is expected to have a large proportion the years to come. Although, the renewable energy is relied on oil production, the swift on another form of energy will shrink oil demands and oil prices too.
Finally, gathering all information, it becomes clear that our current global economic condition is not promising an immediate growth inflation. The incapability of the societies to purchase oil (there is no financial capacity) is reducing oil supply and with few prospects of demand the chances of rising the prices are few. Nonetheless, we must be optimistic that things will radically change within the next few years and after stabilizing this issues, because there are severe plans to be developed and huge investments to be made. (TAP, Turk Stream, Off-shore operations etc.).
Simon Trevezas,
Oil and Gas Analyst for CyprusGasNews
Email: [email protected]
