Standard Chartered last week issued the most gloomy forecast yet on the future price of oil: US$10 per barrel. What impact would such a fall have on North Sea companies, the consumer and the economy?
OIL INDUSTRY
Up to 65,000 jobs have already been lost from the British offshore oil industry since the cost of crude fell from a peak of US$115 per barrel in June 2014 to its latest level of US$30. A further decline to US$10 would clearly turn a cull into a massacre, not least because the North Sea is a high-cost place to operate, with the break-even price for many fields about US$60.
Just last week, BP unveiled plans to cut a further 4,000 jobs — most over the next 12 months — with 600 of them in Aberdeen. Shell has promised to cut 2,800 if, as expected, its merger with BG goes through in the next few weeks.
Around the world, 68 oil projects, with a combined investment cost of US$380 billion, have been dumped over the past year, according to Edinburgh-based global oil consultancy Wood Mackenzie.
Thirty-seven North American oil and gas producers have filed for bankruptcy, according to Texas-based law firm Haynes and Boone, while analysts have warned that half of US shale drillers could be out of business if the slump continues.
Dividend payments from Shell and others could be slashed if oil skids further and a major new round of takeovers would almost certainly begin. Sub-US$10 oil in the late 1980s led to BP buying rival Amoco for US$42 billion and a series of other mega-mergers as companies sought to bulk up while cutting jobs and offices.
CONSUMERS
Motorists have already benefited from lower petrol prices — which are now below £1 (US$1.43) per liter in some places — but they still do not reflect the true cost of supplies, and US$10 oil would bring more benefits.
The last time that price was reached — during the height of the Asian financial crisis in 1998 — petrol prices fell to about £0.86 per liter. Oil companies argue that the vast majority of the price of petrol is made up of taxes, but a further collapse in crude values would produce a glut of cheap refined products and pressure to pass on cuts.
Many international gas contracts are also tied to oil prices and wholesale prices have fallen by at least 30 percent over the past 18 months. These lower costs have not been fully passed onto householders. Energy regulator Ofgem on Friday last week said that the “big six” UK suppliers are overcharging “for the vast majority of people.”
Despite growth in wind and solar for providing electricity, gas is still the key fuel for energy generation, whether in homes or power stations. Even without lower crude prices, there have been growing expectations that power prices would at least remain flat from now until the end of the decade.
THE ECONOMY
A fall in oil prices is the same as a tax cut for consumers. It means they have more to spend on other goods and services, though there is some evidence that UK car owners are spending some of their windfall on extra petrol as they increase the kilometers they drive.
A slump in oil prices to US$10 would not mean a big fall in pump prices because of the tax levied, but businesses would get a big lift from cheaper oil products. It cuts the cost of transport and there are also benefits from cheaper plastics, fertilizers and synthetic fabrics.
The downward pressure on inflation would persuade the Bank of England to keep interest rates lower for longer. That is bad news for savers, but good for mortgage payers and high-street spending.
The government’s hope would be that consumers spend more on goods and services produced by UK businesses, boosting growth. However, Britain is an open economy, with trade accounting for about one-third of economic activity, so if extra cash goes on imports it would widen the trade deficit.
Scotland would suffer as more oil firms pull out of North Sea production or lay-off staff. From the UK Treasury’s point of view, the bad news is the big loss in tax revenues that inevitably follows, though this should be compensated by tax receipts from a higher growth rate.
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