Global oversupply has resulted in oil prices going into a tailspin with Brent crude falling to $29.80 a barrel, a level that was last seen in 2003. Barely a year ago, Brent was at $60 and in June 2014, prices had touched $115 a barrel.
The New York Times reports that there are a number of reasons that have led to the fall in prices, including the increase in American and Iraqi oil production and the slowing demand from China and other developing countries.
While demand for oil declines and oil stock increases, the world’s largest exporter of oil, Saudi Arabia, shows no signs of lowering production. Meanwhile, the U.S. Energy Information Administration has reported that crude oil production in the country fell by 60,000 barrels a day in November from the prior month to 9.2 million barrels a day. In October, the decrease in production had been even steeper, with output falling by 160,000 daily barrels.
With no end in sight to dropping prices, several oil companies are feeling the strain. Kinder Morgan, a pipeline company recently announces that it is reviewing its dividend.
Steven H. Pruett, president and chief executive of Elevation Resources, a Texas oil company, summed up the problems American oil firms face as prices fall, “It’s another damaging blow to the U.S. oil industry. The rig count will continue to decline, the production decline will accelerate and capital spending plans will be curtailed further, as will employment.”
The number of oil and gas workers who have lost their jobs over the last year are estimated to be 250,000. Texas, the biggest oil producer in America, has had more than 50,000 lay-offs in it oil industry.
While lower oil prices benefit the consumer and increase the level of disposable income in individual hands, lenders to the oil sector or to businesses directly linked with oil firms need to be circumspect. Companies in the oil supply chain are likely to feel the impact that reduced oil prices have on the entire industry.
The fall in production by domestic oil companies would have been greater if it were not for their improved efficiency and because their service companies were forced to lower prices.
An important reason for the latest fall in oil prices has been the decision by the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, in November 2014 not to cut production to boost prices.
In fact, Saudi Arabia seems to be guided in their policy of refusing to reduce production in the face of falling prices by what their oil minister Sheikh Zaki Yamani said over four decades ago, “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.”
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