The Oil and Gas industry is one of biggest sectors in the world in terms of the dollar value, it employs millions of workers worldwide and it creates billions of dollars globally each year. However, during the last couple of years the demand for oil has reduced (due to fuel alternatives) and due to a lack of discovery.
Like any other big industry, supply and demand plays a huge part and one of the main problems that occurs within the Oil and Gas business is a decline in the price of a barrel of oil. In 2014, the prices were cut in half reaching an all-time low that had not been seen since the global recession between 2007 and 2009. 4 years later and the price per barrel is still not back to what it was due to several reasons explained below:
The U.S. Dollar
The American Dollar was the main factor in regard to the decline of Oil because there was a high appreciation in the U.S. dollar index and this led to the drop-in oil prices. The market was then put under a lot of pressure, because the value of the dollar was strong which meant the value of commodities was falling. It is important to note that global commodity prices are usually in dollars and fall when the U.S. Dollar is strong.
In 2014, the economies of Europe and other developing countries were weakening and because vehicles are becoming more efficient, there was a low demand for fuel. China (being the world’s largest oil importer), had a devaluation in their currency which suggested that the economy was not doing great and this caused a huge hit to the global demand. It also caused traders to dump oil shares.
Organisation of the Petroleum Exporting Countries (OPEC)
OPEC, otherwise known as a group of oil producers, were not willing to “prop up” the oil markets. According to Investopedia, within OPEC, Iran, Venezuela and Algeria wanted to cut production to firm up prices but Saudi Arabia, the UAE and other Gulf allies refused to do so. Iraq increased their supply which resulted in an oversupply of oil. This led to a downward pressure on oil prices.
It may seem like the Oil and Gas industry is diminishing slowly but it is not always as bad as it seems. There may not be a surplus of the current oil being used in companies but there is always the ‘unconventional’ oil like tar sands and oil shale. They require more equipment, more technology and more cost but it is an almost perfect solution for the current worry.
Another factor to take into consideration is the production of natural gases. Natural gases are extremely cheap at the moment and there is a bigger supply for them compared to oil reserves, so companies can start to invest in this alternative route. Combining the both will be a way to stop oil and gas companies from feeling the burn if the prices start to rise again.
The industry is currently going through its second year of recovery, with an increased upstream in production. Furthermore, the price of oil has stabilised (at a steady rate of around $50 per barrel). There is said to be an increase in active drilling rigs, having gone from 591 to 780+ in a year and 100,000 jobs are expected to be created in the next couple of years. It is key to remember that one of the biggest threats to the Oil and Gas Industry is the use of alternative forms of fuel. However companies within the sector are balancing their risk by investing in alternative energies.