Tag Archives: Crude Oil

Low Price Of Crude Oil Hits American Foes And Friends

WASHINGTON, December 24, 2015 – Countries heavily dependent on oil exports are losing out on billions of dollars of revenue as crude oil prices continue to decline, placing stress on some countries who conflict with the United States.

Cheap oil hurts revenues for some of our foes and helps some of our friends. The Europeans, South Koreans and Japanese — they’re all winners,” said Robert McNally, who was director for energy in President George W. Bush’s National Security Council and now head of consulting firm the Rapidan Group. “It’s not good for Russia, that’s for sure, and it’s not good for Iran.”

Cheap oil has also had serious consequences for the administration of Venezuelan President Nicolas Maduro, whose socialist party, the United Social Party of Venezuela (PSUV), recently lost control of the government in a landslide. Oil exports account for 90% of the country’s revenues.

Saudi Arabia continues to maintain production rather than cut supply to move prices higher.

The Saudis are instead producing oil at near record levels, making development of new sources such as those in the Arctic, Canadian oil sands, U.S. shale and Brazil’s offshore fields much less viable. Meanwhile the Saudis are battling for market share with neighboring Iraq and regional rival Iran.

The Iranian government is being forced to lower projections, and thus expectations associated with an additional half-million barrels a day allowed once sanctions are lifted in mid-2016. The removal of these sanctions are connected to the deal to limit the country’s nuclear program agreed upon earlier this year.

Additional issues facing the Iranians are connected with their hopes that the lifting of sanctions would allow for international companies to develop their oil and gas resourced, which have been off-limits to foreign firms since the expansion of sanctions in 2012.

Should Iran come out of sanctions, they will face a very different market than the one they had left in 2012,said special envoy and coordinator of international energy affairs for the State Department Amos Hochstein. “They were forced to recede in a world of over $100 oil, and sanctions will be lifted at $36 oil. They will have to work harder to convince companies to come in and take the risk for supporting their energy infrastructure and their energy production.”

Russia is another adversary to the U.S. facing problems as a result of the downward trend in oil prices. Compounded by sanctions imposed by European and U.S. allies, Russian oil production will also be forced to compete with the newly added exports coming out of Iran.

All our calculations were based on the oil price of $50 a barrel,” Putin said, half the expectations from the end of 2014. He added: “I believe we will have to make further adjustments.”

Over the past two years the price of the benchmark West Texas Intermediate grade of crude oil has slipped from $97.63 a barrel in December of 2013 to $37.60 on Wednesday.

While American adversaries are being negatively affected by the price decrease, some allies are also being hurt. The largest sources of U.S. imports are Canada, Mexico and Saudi Arabia. They, along with Brazil and West Africa, are suffering.

There’s no way to quantify whether cheap oil is good for us, because the bad guys lose and good guys win,” Hochstein cautioned. “It doesn’t work that way. There are winners and losers all across the board.”

Around $200 billion of investments in energy have been canceled this year, with energy companies planning to cut another 3 to 8 percent from their investments next year,” explained Saudi Prince Abdelaziz bin Salman al Saud, vice minister of petroleum and mineral resources at a conference in Doha in November. “This is the first time since the mid-1980s that the oil and gas industry will have cut investment in two consecutive years.”

Cuts in investments are also coming in the United States as well. North Dakota has been a major part of the U.S. shale oil boom but has already seen a decrease in drilling rig count from 172 at the beginning of the year to only 65 on Wednesday.

Independent drilling companies are being hit hard by the low prices and as a result banks such as Wells Fargo are taking action to shore up capital reserves in case of delays or even default on loan payments by these companies.

Pioneer Natural Resources, a Texas-based exploration and production firm, plans to trim budgets between 20 and 30 percent in 2016 according to CEO Scott Sheffield in an email. The company expects additional layoff to the 250,000 already let go.

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Layoffs Begin as States React to Major Drop in Oil Prices

Given the major drop in the price of crude oil, states that are dependent on the revenue from oil and gas, such as Texas, Alaska, and Louisiana, are now preparing for the effect the falling prices will have on their local economies.

The Advocate reported that oil prices, which dropped from $106 a barrel in June, to $55.73 a barrel in December, experienced a “47 percent price decline in less than six months.”

According to Reuters, this major drop in crude oil prices was met with “at least a dozen U.S. energy companies” being forced to cut spending plans for next year, which is “bad news for states that rely on jobs, wealth and tax income they provide.

The Associated Press reported that the Governor of Alaska, Bill Walker, “halted new spending on six high-profile projects,” on Friday, citing the state’s “$3.5 billion budget deficit, which has increased as oil prices have dropped sharply.

According to the New York Times, in Texas, after “2,300 oil and gas jobs” were cut in October and November, Hercules Offshore in Houston has announced that it will “lay off about 300 employees who work on the company’s rigs in the Gulf of Mexico” by the end of December.

Reuters reported that following the layoffs, realtors in Texas are “predicting a sharp decline, up to 12 percent, in home sales next year.”

According to RT, Louisiana’s 2015-16 budget will be “$1.4 billion short, with 162 state government positions already eliminated and more to be discontinued.”

Dale Doucet, an energy trader for Brock Investor Service in Lafayette, Louisiana, told The Advocate that the price of oil could fall further, but he predicts that the cut in production, along with the rising world demand, will raise prices in 2015.

When you go into these pricing extremes, it really stresses the system and exposes vulnerabilities,” Doucet said.

Kristy Nichols, the chief budget advisor to Louisiana Governor Bobby Jindal, said that when creating future budgets, they are re-examining everything in the oil and gas industry.

Our approach to the 2016 budget includes a full review of every activity in every agency’s budget and the cost associated with them,” said Nichols. “Nothing is off the table at this point.”

While the current decline in oil prices has had a major effect, the New York Times reported that the situation today “could have been far worse if oil-producing states had failed to diversify their economies,” following the last major drop in the 1980s.