• Alarming signals from the oil industry

    Ben D. Kritz

    Ben D. Kritz

    ON Wednesday (Thursday here in Manila), a routine auction of Gulf of Mexico oil and gas drilling leases had an  alarming result, one that indicates the global oil industry may be in deep trouble.

    The auction, conducted by the US Department of Energy, gathered just $22.7 million in sales from five companies, led by BHP Billiton and Anadarko Petroleum. But as The New York Times pointed out in its report on the auction, what was most worrisome was who was absent: ExxonMobil, Shell and Chevron, the three volume leaders in Gulf production, did not even bother to participate.

    As though to confirm the petroleum giants’ decision to sit on their hands, the price of the US benchmark West Texas Intermediate crude dropped more than 4 percent on Wednesday, losing $1.82 per barrel to close at $40.80 – perilously close to the “abandon all hope” psychological barrier of $40 per barrel, and extending the current decline in oil prices to an eighth straight week. Since the ongoing oil price rout is being driven by oversupply – the US DOE estimates the current global surplus is about 2 million barrels per day – the lack of interest in Gulf of Mexico concessions might have actually helped to prevent oil prices from sinking even lower (prices recovered slightly on Thursday, with WTI closing up $0.34 at $41.14/bbl).

    The Times report suggested that Wednesday’s auction results signal a clear shift in strategy from ensuring future production to cost-cutting. Until recently, the big oil companies have been firm in their insistence that oil prices will rebound eventually, and that they would not compromise long-term production plans for the present, presumably temporary downturn in prices.

    For this year, the DOE is projecting an increase in US daily production to 9.4 million barrels a day from an average of 8.7 million per day last year; in 2016, production is forecast to decline a bit to an even 9 million barrels per day. With the likelihood that OPEC will maintain its 30 million barrel per day production ceiling (which the cartel routinely exceeds by about a million barrels per day) to help prop up members like Iraq, Libya, Venezuela and Iran, that pushes the oil price depression into at least 2017 with the very real possibility prices could plumb depths approaching $30/bbl.

    What these prospects mean for this part of the world is at best a mixed blessing. Here in the Philippines, lower oil prices are generally good for the economy; the downward pressure falling oil prices put on inflation more than compensates for some export losses and lower revenues in the energy sector. If it has a longer-term effect, it will be felt in the loss in investments; attractive though the Philippines’ resource potential may be, tapping it is problematic, and certainly not justified for the cost as long as oil prices stay low.

    Vietnam, which is aggressively pursuing domestic energy production, will probably feel the pinch in investments even more. Indonesia, where energy production is a much bigger part of the economy, appears headed for serious trouble; one indicator of that may be the collapse of the rupiah, which has lost more than 3.6 percent against the US dollar in the past month (a rate about 1 percent faster than the peso’s depreciation, which is almost entirely determined by the strength or weakness of the dollar).

    And all that assumes that current expectations of a price recovery from sometime in 2017 are not already too optimistic. If what we are seeing is a “new normal” rather than just an unusually long price slide, it will force economic shifts that will take years to adjust to; even if the Philippines is not as directly affected as some other countries, greater regional and global linkages through, for example, APEC and the Asean Economic Community will indirectly pressure the Philippine economy.



    Please follow our commenting guidelines.

    1 Comment

    1. In case this is a sign that the world meltdown is starting, I wonder what the ideology that is being applied on our country’s economic policies today says what about should be done. More deficit spending?