The global oil industry is going through a lesson in Economics 101: When supply increases, prices go down. Crude oil prices are currently hovering around $45 per barrel, a 65 percent reduction from a summer 2014 peak at over $100 per barrel. A surplus in crude oil supply has kept these prices down, a trend that is likely to persist as future demand remains uncertain and oil policies are used as political tools.
Last year, the Organization of the Petroleum Exporting Companies (OPEC) allowed prices to fall in favor of increased crude oil supply in the market. Historically, OPEC has managed oil production to keep supply in balance with demand, thereby ensuring relatively steady prices. For the time being, prices are being left up to market dynamics.
Adding to the unrestricted oil supply from OPEC members, the U.S. has had an unprecedented surge in oil production over the past five years, and Canadian and Iraqi oil exports are rising. The anticipated influx of Iranian oil into the market, if international sanctions are lifted, will only compound the oversupply problem. Tougher fuel economy regulations and the growth in alternative energy sources are also contributing to low oil prices by reducing the global demand for oil.
Drivers, households, and travelers have certainly benefited from lower fuel prices, but major oil companies, such as Exxon Mobil Corp., BP, and Total Chevron, are hurting. All of them have experienced 37-41 percent reductions between 2014 and 2015 first quarter revenues. These companies are now trying to figure out how to adapt to this new reality and assessing the future of their research and development projects amidst uncertainty in the market.
The direction of the oil industry also has large implications for international relations. Many countries, such as Russia, Nigeria, and Venezuela, are dependent upon oil revenue to support their budgets. Due to the low oil prices, these countries have seen sharp reductions in government revenues. In August, the President of Ecuador, an OPEC nation, announced that his country was producing at a loss.
Oil policies are increasingly being used as a powerful political tool. Saudi Arabian oil price manipulation has allowed the Kingdom to show dominance in the Persian Gulf and Arabian Peninsula amidst increased tensions. The Russian government, which requires oil prices to average $100 to cover anticipated spending, uses its oil policy as a geopolitical balance against the West. Moreover, ISIS is dumping oil on the black market to help fund its insurgency; Assistant Secretary of Treasury for Terrorist Financing Daniel Glaser estimated that ISIS can make up to $500 million in one year.
Oil industry forecasts may offer some good news. Due to troublesome economic conditions, some oil-producing countries and companies are being forced to slow-down production, which would help mitigate the oversupply problem. Additionally, the oil industry is expected to see increasing global demand to help compensate for the surplus. Thus far, weakening economies in large oil-importing countries in Europe and China have led to a reduction in demand. The International Energy Agency, however, expects oil demand to grow to a five-year high in 2015 thanks to lower oil prices and a strengthening macroeconomic backdrop.
If the oil industry were to follow the normal economic trend, suppliers could expect a boom to follow this bust. Most energy experts, however, believe that such a rebound is unlikely in the near future. Goldman Sachs, for example, lowered its 2016 forecast in early September from $57 per barrel to $45. Oil revenue-based companies and countries alike are encouraged to search for new profit-generating sources and to devise strategies to keep their oil industries afloat during this rocky time.
Alana Garellek is an analyst at The Cipher Brief.
