The late 2014 crude oil price slump took almost everyone by surprise. Once again the volatility of the Oil & Gas surfaced and the slump broke the high riding price-based dreams of many companies.
A hundred plus price, through 2013, had opened the opportunity for new technology implementation, unconventional resource exploitation and the possibility of alternate renewable sources taking a chunk in the main line energy supply. The sequential price slump brought a halt to all those high riding plans. The supply glut over the receding demand, as taught in economics 101, is the monster who chomped away the premium from the crude barrel price tags. Many a reasons have been and are being argued around the potential cause of OPEC members being stubborn on their production spree – ranging from vendetta against Russia, to bringing down Shale production of US. While the melancholy affected many oil & gas companies – majors and minions; the Nations – developed or developing, have also seemed equally perplexed by the uncertainty prevailing in the international markets. Media and other popular voices have been quick in professing, for which nation the slump has resulted in a positive tide and for which it has been a bane. The more coherent thoughts are though still sunder on the events and awaiting uncertainty to fade, and prices to stabilize to effectively gauge the outcome of the meandering on the graph.
The dip or surge in price, related to such widely and globally traded commodity, with apparent winners and losers stemming from uncertainty, actually have much far reaching and unpredictable results. Intermediated by international politics, domestic politics, changing government policies, industrial diaspora and varied multi-dimensional factors across countries, the effect of such uncertainties can bring out results far from obvious. Those who seem to be obvious winners, can actually stand to face inherently difficult challenges and perpetrators of events themselves get on to the receiving end, while obvious loser walks away with moderate discomfort.
A country like India, with gigantic import bill on account of crude oil imports should be glad when such a slump surfaces. The first drops in the price, was perceived as the boon to the new in power government. It was speculated that the new government shall please the masses and secure a strong foothold with the popular move of reducing fuel prices in the domestic market. Instead, we witnessed a country erupting against the same government which was brought in power with a landslide victory. In an attempt to reduce subsidy bills, the government allowed only a fractional reduction in price of fuel by increasing taxes and the perceived boon stands disappeared. The same political party, which is in control of the central government lost the legislative elections in nation’s capital by a huge margin. Is it an aftermath of international crude oil volatility?
Interestingly, while OPEC members perceived as perpetrators of the supply glut, themselves do not seem to be in a very good place. These countries rely heavily on oil revenue as a precursor for economic development. While the production breakeven (the price per barrel for the company to produce profitably) is towards a lower side in these oil rich countries, the fiscal breakeven ( the price per barrel at which the economy of the country stay on positive side) is still pretty high. With the oil price running low, a country like Venezuela finds itself in deep trouble. Already hounded by economic instability, the additional impact has driven the inflation through the roof. Poverty has taken the best of people and we can see an economy at the brink of collapse. Middle Eastern countries are also seen putting off other infrastructure and development projects on halt for an uncertain period. This has led to loss of employment for hordes of labours from eastern countries, who are now rushing back to their home. Again, an impact on the nodes which do not feature in immediate range of the original event.
If we believe, and with a very strong ‘IF[i]’ there, that the OPEC supply was kept continued to bring down the growing Shale Oil industry in United States of America, then the prime target of the whole diaspora seems to be walking sway, shrugging it off as a minor discomfort. While some shale minnows faced major financial loses in face of dropped price, the shale drilling being a very flexible practice by itself, can be easily and in no time be scaled up or down. This creates a possibility of a very fast reaction to market changes, thus minimizing damages. United States, though till now do not seem to see a drop in domestic production of shale oil, might witness it in near future. This might compel them to import that fraction from outside, like the other quantum they already do. That would not be a major discomfort for them and if in fact prices continue to be low, it will only add to their savings. Given that US has already been importing a major quantum, the price drop might be in favour of the nation, if we discount the halt in growth of sand oils.
Russia, it seems, might be an actual loser in the whole debacle. With a relatively high production break even and heavy reliance of the economy on hydrocarbons, the price drop already has left the economy in a bad shape. A popular understanding is that America hand in gloves with OPEC, led the price fall to teach Putin a lesson for his advances in Ukraine and Crimea.[ii] If this has truth even to the remotest , it can be inferred that the motive to un-stabilize Russian economy has twin fold advantage. One, of leaving them with little money to make any further military advances; and two, of making Putin unpopular within the country because of the dropping economy. This might just work out. But, with open media and easy access to information intelligence, if the countrymen of Putin come to believe this story, he might just gain greater trust and support from them instead, making him far more unpredictable to the western world.
The inherent volatility of the oil & gas world, makes everything that touches it, unpredictable and volatile. The uncertainty seems to have a snowball effect and works like a spiral, leading to a series of events with uncertain, unpredictable and multi-dimensional outcomes. While the price trend has reversed for now, much is expected and awaited from the June meeting of OPEC. Will OPEC be cutting the productions to meet the lowered demand and consequently let the price stabilize? We know not. Even if that happens, will the ripple effect initiated by the slump be reversed? We know not.
Uncertainties in Oil & Gas are like earthquakes; you may know one is not happening right now, but cannot predict when it shall strike next. The volatility of this industry is capable of leaving some catastrophic and cascading effects.