There is a saying in the oil industry that goes
like, “When E&P companies have a cold, the oil and gas service sectors have
a heart attack”.
The oil industry, with its history of booms and
busts that date back to the 1900s, is in a new downturn. Earnings are down for
companies that have made record profits in recent years, leading them to sharply
cut investments in exploration and production. Reports indicate that more than
200,000 oil workers have lost their jobs across the value chain. Tullow Oil, a
company with acreage in Kenya and that discovered oil in March 2012 at the Ngamia-1
well, reduced their exploration to $200 million for the previous $1 Billion and
this has seen their activities reduced to a bare minimum.
The cause is the plunging price of a barrel of oil,
which has been cut roughly in half since June 2014, reaching levels last seen
during the depths of the 2009 recession. While the causes of past price swings
have all been different, the effects have generally been the same. To refresh
your mind, you need to go back to 2008-2009; the period saw a decline in oil
prices from almost $150.00 per barrel of oil all the way down to under $40.00
per barrel.
So what made the prices fall from $115 per barrel
to the current $45-$51 per barrel? While this may seem like a very complicated
question, it boils down to the simple economics of supply and demand. The oil
price is partly determined by actual supply and demand, and partly by
expectation. Demand for energy is closely related to economic activity.
The oil price fall, by more than 50% since June,
2014 comes after nearly five years of stability. At a meeting in Vienna on
November 27th, 2014, members of OPEC (Organisation of Petroleum
Exporting Countries), who controls nearly 40% of the world market, failed to
reach agreement on production curbs, sending the price on a free fall.
...to be continued
