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Winners, Losers & Opec

opec logoThe International Energy Agency (IEA) have revealed their forecast for the oil price is continued falls with little sign of a rebalance in the current combination of low demand and supply glut.

Whilst a ‘new era of cheap oil’ suggests positive news for consumers, motorists and global growth the reality this time is somewhat different.

Economic growth

In its latest report the IEA cut its forecast for 2015 global demand growth by 230,000 barrels per day (bpd) to 900,000 with overall global demand expected to be 93.3m bpd. Although growth exists, it is not being spurred on by the low oil price in quite the way normally expected.

The report stated:

“As for demand, oil price drops are sometimes described as a ‘tax cut’ and a boon for the economy, but this time round their stimulus effect may be modest.

“The adverse impact of the oil price rout on oil-exporting economies looks likely to offset, if not exceed, the stimulus it could provide for oil importing countries.”

The Shale revolution

The IEA however calmed fears that the on-going oil price crash will have a catastrophic impact on buoyant US shale oil production, even though the economics of extraction are less clear at the current price level.

Indeed total production from non-Opec countries, including the US, was forecast to grow by 1.9m bpd this year, slowing to 1.3m bpd in 2015.

The economics of exploration

In contrast Global energy consultancy Wood Mackenzie has said that 32 potential European oil field developments containing 4.9bn barrels of oil equivalent (BOE) could be at risk with oil prices below $60 per barrel placing £55bn of required funding in doubt as returns fall and risks rise.

James Webb, Lead Analyst for Continental and Mediterranean Europe Upstream Research at Wood Mackenzie highlighted the variances in the economic viability of exploration based upon regional differentials in efficiency:

“Major projects and investment in the UK and across Continental and Mediterranean Europe could be at risk if prices stay below $80 per barrel, as over 70pc of the pre-FID [final investment decision] reserves in each region have a break-even [price] in excess of $60 per barrel.

“Whereas in Norway almost 80pc of reserves require an oil price of less than $60 per barrel to break even.”

Indeed a recent report, by PwC, the professional services company, highlighted the risks of inefficiency being particularly acute in the UK and called for immediate action to cut production costs in the oil and gas industry through better management in order to save up to £15 billion and preserve the life-span of North Sea fields and jobs.

The report blamed poor planning, and slow decision-making for driving up costs and said better management could cut the average price of North Sea oil extraction from its present level of £17 per barrel to £14.

Brian Campbell, Head of Forensics at PwC in Scotland, said:

“We have known for some time that the oil and gas industry isn’t the most efficient with its resources.”

Whilst Alastair Geddes, head of oil and gas consulting in Scotland with PwC claimed:

“We believe improved efficiencies in management and working practices offer bigger and much more sustainable savings than simply cutting jobs when it comes to extending the life of North Sea fields.”

However the IEA report was more upbeat on the global viability of economic extraction stating:

“Barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout.

“Today’s oil spending cuts will dent supply — just not right now. So long is the lead [time] of oil projects that price swings can take time to work their way through to supply. Projects that have already been funded will for the most part go on”

Renewable Energy

Beyond the economic viability of oil and gas extraction, the falling oil price also threatens the burgeoning renewable energy market.

Peter Atherton, Energy Analyst with Liberum Capital claimed:

“Renewable energy subsidies have been mostly sold to the public on the basis of the economic benefits. But the economic arguments hinged on the idea that fossil fuel prices would get more expensive, while expensive renewable subsidies would be able to come down over time. That’s looking doubtful now.”


The downfall of Opec, the cartel traditionally controlling the cost of oil, has been exaggerated. Initially many felt the fall in the oil price and the competitive pressure wrought by the US and Libya opening up new reserves to the market would decrease Opec influence and create a more stable oil market. Some even expected to be celebrating the end of the wily old cartel. Nothing of the sort has happened however.

Indeed the price falls could get significantly more dramatic with Opec claiming that a fall to $40 would not unduly concern them if they were to achieve their main objective of tackling the glut of oil being extracted from US shale

Suhail al-Mazrouei, energy minister of the United Arab Emirates said:

“We are not going to change our minds because the prices went to $60, or to $40.”

Opec are looking at the long game, taking a short term hit on prices, bolstered by plentiful capital reserves and all the while as the downward pressure increases, greater numbers of ‘new entrant’ oil and renewable sources, including US shale, can be strangled at or soon after birth allowing Opec to reassert their power and influence over the global oil market.

The oil price collapse: winners, losers and Opec.