Who would have thought in the summer of 2014 that the industry would long for the oil price to recover to $61 per barrel?
This is where the oil price was one year ago today.
With Brent oil currently trading at around $38 and significant uncertainty around what will happen in 2016, companies are right to be cautious as they finalise their budgets for 2016 and beyond.
The combination of oversupply, slower growth in key economies such as China and enduring political uncertainty no doubt will continue to create significant volatility in the oil price.
The impact of this uncertainty is that the share price of the majority of companies in the oil and gas sector have taken a battering recently.
It is estimated by Bloomberg and others that the oil and gas sector has lost over $1.3trillion in market value over the last year, of which approximately $0.25trillion alone was a direct result of OPEC’s decision not to impose a production ceiling on December 4.
This immediate impact is particularly surprising as OPEC countries have been producing in excess of their production ceiling now for 17 years in a row.
To put this staggering amount in context, $1.3trillion is broadly equivalent to the Gross Domestic Product of Mexico or equivalent to the value of roughly half of all the companies in the FTSE 100 index.
This decline in market value is of course partly offset by other economic benefits and GDP growth as a result of lower commodity prices on the wider economies of the world.
The 12 OPEC members certainly have their own challenges at the moment to meet their annual government budget requirements.
Most of the OPEC countries need oil prices well in excess of $80 per barrel to meet their annual budget requirements. The low commodity prices have put significant stress and strain on both OPEC and non-OPEC oil producing countries around the world.
In addition to the market value lost by the oil and gas sector around the world, it is estimated that OPEC’s ‘opportunity cost’ in 2015 alone has been in excess of $0.5 trillion. This represents the additional revenue OPEC members could have realised if crude was c. $99 per barrel (average Brent oil price in 2014) compared with the average Brent oil price for 2015 of roughly $53 per barrel.
With the benefit of hindsight, has it been worth it for OPEC to maintain their market share strategy?
No doubt this will become clear in time, but this is very much a political as well as an economic question. It is estimated that to balance world oil supply and demand, roughly 3 million barrels a day of production have to be removed from the market.
If removed at current market prices, revenues would be impacted by around $50billion annually.
Logic would dictate that taking a circa $50billion revenue ‘hit’ is a better outcome for the majority of OPEC members and most companies in the oil and gas industry than dealing with the negative impact of the $1.3trillion reduction in market value.
However politics often trumps logic and economics. Hopefully economic reality and common sense will prevail sometime soon.
Professor Paul de Leeuw is director of the Oil and Gas Institute at Robert Gordon University in Aberdeen.
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