N

ot long ago, the

benchmark Brent oil
price peaked at US$
116 a barrel its
highest level for
2014 before it
ventured on a relentless slide
of over 60 percent. This drop
in price has plunged the oil
industry into crisis, with major
international oil companies
cancelling billions of dollars
worth of projects planned for
2015/16.
Oil prices have always
resulted in agony at extreme
ends. Although a number of
reasons are attributed by
economists for the outcome, if
we had analysed the facts, we
wouldve known it was coming.
Extremely high prices lead to
demand destruction and overexpenditure on exploration,
which leads to oversupply
and a downward price spiral.
Similarly, extremely low prices
lead to increased consumer
spending on oil-based products
and a withdrawal of EPC
(Engineering, Procurement,
Construction) companies, due
to lower or negative margins
which eventually lead to a
decline in supply, stretching
the prices northwards.
Spooked by a rise in the price
of oil to 55 dollars a barrel in
2005, from less than 20 dollars
at the end of the 20th century,
ethanol-gasoline blending
took priority. And in 2007,
responding to further increases
in oil prices, many countries
raised fuel-economy standards
for vehicles sold.
Government regulations were
introduced in many economies
between 2004 and 2014, to
promote energy conservation
and reduce the demand for
increasingly expensive
imported oil.
Massive demand destruction
and petroleum conservation
techniques have been adopted
around the world.
Such is the see-saw battle
of oil economics.
Soaring prices of petroleum
products force motorists, truck
operators and airlines to reduce
fuel consumption. The number
of vehicle journeys begins
to fall, consumers purchase
smaller and increasingly
fuel-efficient cars, trucking
companies rationalise their
delivery schedules, and airlines
revamp and streamline their
networks and remove excess

PRESS LOFT/TAPETENHANS

THE OIL MARKET

REBALANCING ACT UNDERWAY

Praveen Jaiswal reports on the see-saw battle for oil price supremacy
weight from aircraft. Gas-based
fuels became increasingly
popular as a cheaper alternative
fuel for buses and trucks.
Sustained low oil prices are
also likely to cause stress on
oil-producing countries. High
prices did more than simply
contain demand they acted as
a key catalyst for the so-called
shale boom, which resulted
in the fastest growth of oil
production in history, in 2013
and 2014. Output surged,
and currently stands above
nine million barrels a day.
Production growth has
accelerated, as shale drillers
become more efficient.
Across the globe, high prices
stimulated record investments
in exploration and production.
So much extra crude has come
from shale and other sources
that oil prices continued to
free-fall.
Recently, we have witnessed
the global oil market at
unsustainable levels, with
stagnating demand and
increasing supply. The only
rational outcome was a sharp
correction in prices, to curb
demand destruction and curtail
investments in new sources
of production.
But the need for lower prices
was shrouded by two factors.
Firstly, many observers doubted
the shale revolution could last.
Second, increased output from
the US was offset by a loss of
production across the Middle
East and Africa, as a result of

In the latter half of 2014, it

became clear that geopolitics
alone cannot interrupt the
supply of crude any further

the Arab Spring and sanctions

imposed on Libya, Syria,
Sudan and Iran.
In 2011, OPEC concluded that
shale oil should not be viewed
as anything other than a source
of marginal addition to crude
oil supply. By 2013, however,
that position was no longer
tenable, as shale production
continued to accelerate.
OPECs 2012 World Oil
Outlook acknowledged that
shale oil represents a large
change to the supply picture,
the scale of which is more
obvious today.
Until mid 2014, developments
around oil-producing regions

kept the world guessing. It

seemed that unplanned outages
might offset the continued
rise of shale production.
The perception of rising
geopolitical risks to oil supplies
encouraged hedge fund brokers
to be bullish. But in the latter
half of 2014, it became clear
that geopolitics alone cannot
interrupt the supply of crude
any further. Oil continued to
flow from all corners, and it
became increasingly obvious
that a sharp price correction
was inevitable.
Given that signs of a recovery
in crude oil demand remain
elusive, and a cut in supply is
not visible, when the slide in
prices might halt remains an
unanswered question. The
thought of prices dropping
further is a cause for concern
in oil-producing countries.
The oil price slump is often
portrayed as a straight fight
between Saudi Arabia and
shale drillers, but the real
picture is more complicated.
Shale production is more
expensive than tapping
conventional fields, but cheaper
than some megaprojects. As a
result, oil sands producers have
found themselves caught in
the crossfire between OPEC
on the one hand, and shale
entrepreneurs on the other.
Oil prices must ultimately
drop to a point at which the
market rebalances. And there
are signs that this adjustment
is underway.

The writer is a senior professional in the oil and gas industry. He is based in India.

155 APRIL 2015 LMD