The Take

Oil One Year On23/08/17

One of the first articles I wrote covered what was, at the time, a massive crash in oil prices. It seems fitting that one year on, one of my final articles reviews the changes since then.

As expected, even now the price has not risen above $50 per barrel since the first article, and it appears like that will be the new norm for the foreseeable future. The pressure on the oil industry has continued, with OPEC still trying to keep prices relatively low. While the OPEC countries continue to be relatively unscathed by low oil prices thanks, in part, to large sovereign wealth funds, other countries and parties have not been so fortunate.

At the time of the original article, the oil price had dropped by as much as 60% in a sudden shock to the oil market spurred by a huge oversupply of crude oil. This was in part a result of shale oil from the US entering the market, as well as relative inaction from OPEC nations. The drop in oil prices led to instability in Russia, Venezuela, Iran and Saudi Arabia, countries that were already struggling economically and relied heavily on the high oil price.

Several months later, OPEC finally came to an agreement to begin cutting back on oil production to bring the price of oil some stability and perhaps even raise the price. While the price has not risen, it has stabilised over the past year to between $40 and $50 a barrel. This in turn allowed some US shale producers to come back on line, and appears to be a good enough price to satisfy Russia and Saudi Arabia for the short term. Venezuela, on the other hand, has had a fairly tough time and is plagued not only by economic troubles, but by rising political and social unrest that will likely trigger a significant governmental change going forward.

Companies which are involved in the drilling of oil, or its ancillary services, have dropped in number, and even larger companies such as BHP, Rio Tinto, BP and Exxon Mobil have dropped in share price and remained subdued in revenue forecasts, scaled back oil exploration and new projects, and continue to try to find ways to stabilise revenue and reduce expenses one year on from the price drop. Given the high level of debt many of these companies held, it is unlikely we will see any major growth in the oil industry for the next year or so.

On an even larger scale, certain countries which relied heavily on oil exports have fallen apart – in particular, and as mentioned earlier, Venezuela. Once an extremely rich country of which over 90% of its export revenue were oil based, the cracks began to form in the overall economy as the oil price fell last year. Since then, heavy inflation, political unrest, and an enormous deficit in the government’s budget has led the country into a period of civil unrest. Due to the socialist nature of the Venezuelan economy, shortages in basic goods are rife and the government has been unable to support the country for some time now.

The current president, who took over from Hugo Chavez, leads what is essentially a one-party government, but opposition from the Venezuelan public has increased significantly since Chavez’s passing. President Maduro is simply not as popular as Chavez, and the changes to the government and economy that have occurred since his leadership commenced in 2013 have been just as unpopular. Tensions have existed since as early as 2014 against his leadership. While the drop in oil prices is not directly his fault, the mismanagement of state owned assets, and the lack of diversification efforts, are in part what has lead Venezuela into the economic collapse it is now very likely facing. This has directly caused a steep increase in riots and other actions against the current government.

There is some suggestion that as the situation in Venezuela continues, or worsens, it may lead to decreased oil output from the nation, thus triggering an eventual rise in price if other oil producing nations don’t make up the difference. This effect has yet to be seen, but is certainly possible if the state-owned oil producing companies defaults on its upcoming debts to China and Russia, or more so if the government undergoes a coup, shift in leadership, or in a worst case scenario, the delicate balance of the economy leads to complete collapse.

Nate is the Publications Director at QUTEFS. If you are interested in writing an article for The Take, contact