For over 20 years I have analysed oil price fluctuations. Why? Well, every country’s economic prospects and people’s jobs, yours and mine, are affected in one way or another by what happens to oil prices.
Life and death decisions, including continuing national sovereignty for some nations, hinge on the price of oil.
The current dramatic and fast 35% fall in oil price could be a pivotal moment in historical events. For example, will the oil revenue dependent Russian economy survive if oil prices stay at around $70 a barrel? If not, what action will Russia take?
Will more wind turbines, both onshore and offshore, be built in the UK? Will the UK and the world give up trying to control climate change? Will the UK’s national debt increase? Will jobs disappear? The price of oil affects these and many more issues.
The impact on the UK of sustained low oil prices would be devastating. Marginal North Sea oil fields that depend on high oil prices to make it worthwhile to garner their remaining reserves will become unviable.
Production costs per barrel of North Sea oil are much higher today than in the halcyon days of easy access oil from the huge Brent and Forties fields.
Oil companies will seek safer and easier investment opportunities elsewhere. One consequence of not continuing to work marginal fields is that decommissioning of oil wells will gather pace and enormous expenditure will be incurred. Jobs are already being threatened.
With plunging share prices, can oil service companies keep their current staffing levels? I doubt it. Low oil prices also make the economic prospects for the much-touted UK fracking reserves problematic at best and a dead duck at worst.
Will oil prices recover? In the long run, yes. Demand will increase as populations rise and prices of $150 a barrel may well be realised by 2050.
The current plunge in prices was fast. The reasons for the fall have been well aired in the media but I simply do not accept that Saudi Arabia is so politically naive that it would increase production as a direct challenge to the supremacy of the US.
Short-term political games may be being played out. If Russian concessions on the sovereignty of the Ukraine emerge, then oil prices could be back at $100 a barrel as fast as they have fallen. For the sake of the UK, I hope that is the case.
Alex Russell is a Professor of Petroleum Accounting at Aberdeen Business School.
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