Global crude oil prices have plummeted significantly over the past four months, due mainly to increased supply and a lull in global economic activity. With producers unwilling to rein in supply and stem the falling prices, comparative fiscal disadvantages in their production models will determine the inevitable winnowing process.
Crude oil prices have fallen significantly over the past four months. The international benchmark Brent declined by 22% and the West Texas Intermediate (WTI), by 21% since the beginning June (Figure 1). The decline took its toll on 3Q results for many oil companies including Total, BP, Eni, Cenovus, Suncor, Rosneft as well as the Chinese majors among others.
While a global supply glut and the current lull in global economic activity have been the main drivers for the decline, Abdalla El-Badri, the secretary-general of Organization of the Petroleum Exporting Countries, OPEC, said in a recent oil conference that at a global oil price of US$85 per barrel (about current value), 50% of tight oil production would be in peril. This has dampened expectations of any supply reduction by the group, which meets in the next few days. And just as well: OPEC supplies only about a third of global crude oil consumption and has maintained supply at about 30 million barrels per day since 2008, while the greater proportion of the marginal increase in global supply has been from tight oil, particularly in the United States and Canada.
As oil prices fall, both intuition and competition theory hold that the higher-cost and inefficient producers will be removed from the market. Falling oil prices will impact tight oil producers, mostly in the United States, Canada and Australia; but it will also impact many conventional producers in the Middle East and North Africa, MENA, region, as well as the producers in the Atlantic petroleum provinces of West Africa. While the former need higher oil prices to ensure profitable production, the latter need certain oil price levels to maintain fiscal sustainability thresholds. With each of these groupings eager to ensure sustainable production, a tenuous price face-off is developing between them, adding to market uncertainty but also exposing their vulnerabilities. Continue reading