Featured image is from The Economist!
In the past month or so – we have noticed that the price of crude oil has dropped almost 40% down to 5 year low of about USD60 per barrel. It seems that the price will continue to go lower and perhaps stabilize to around 50 or so. According to WSJ (I think) the price almost hit the stabilized bottom, but not sure when. I guess we will know when that happens.
According to Economist article titled New Economics of Oil, the dropped in price is due to the “war” between the two oil producing giants – OPEC vs shale oil from US. Shale Oil are oil that is extracted from shale rock. Apparently, in the past 4 years or so, American companies has been building a lot of wells to extract shale oil. This is so rampant that the total production of oil from US is 9m barrels a day, which is short of 1m of Saudi Arabia. Amazing.
The recent OPEC meeting – the production of crude oil was not cut. This will mean that the continuous high production of crude oil across the globe both from OPEC and non-OPEC nations will cause the price to continue to drop. I guess, the whole reason is to get the shale oil companies in the US to bust. Saudi and the rest of the big oil producing nation, having to enjoyed years of high oil prices, would be able to sustain much longer. The “newer” companies extracting shale oil will get into financial trouble (revenue cut by 40%) and soon will declare bankrupt.
I foresee that there will be three outcomes:
- Wells get closed down, and oil prices will continue to stabilize
- Consolidation of shale oil companies – creating mega oil companies… (enough to fight OPEC)
- Rich OPEC nations start buying over the shale oil companies…
Any of the three outcomes – will mean that the whole oil production will continue to be controlled by a legalized oil cartel. The problem is of course, countries like Malaysia that dependent on O&G – but not big enough to be a mover in global oil market will continue to suffer until the price stabilizes. We have already seen a cut in terms of government income to a region of 40% as the price of oil dropped. This will add more challenge to the already challenging economic situation in Malaysia. Let’s just hope and pray things will be ok.