$50 is the new $80 in the oil industry

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Getty Images

The buzz from the oil sector is that operators from around the world need to brace themselves due to the economic changes to $50 oil as potentially the next benchmark. This is going to push operators to look for more ways of efficiency. They will have to decrease allotted budgets for upcoming projects by 20 to 30 percent. The amount is double that of the usual expected reduction amount. This decrease and cutting will affect the services and supply chain sectors, making its effect very prominent at lower levels of the industry specifically.

According to oil and gas analysts, the establishment of $50 benchmarks will result negatively on the expected $1.5 trillion of USD expenditures. For the oil industry, it’s going to be a huge task to overcome this large and unexpected oil price average that is already facing ups and downs. The industry is already facing a huge decrease in investments and partnerships with the decline of around $220 billion USD in 2015 and 2016. The actual amount can be much greater than these estimated figures from independent sources.

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According to research analyst James Webb from Wood Mackenzie, the $50 oil price benchmark will affect expected new projects various companies were planning. Senior analyst Obo Idornigie stated the decision is going to mark a huge problem for oil and gas that usually see around 40 to 50 new projects opened by different firms around the world every year. With the decrease in new investment, the possibility of finding new oil reserves and oil extraction will decrease by a great percent. That is why the industry is only expecting to see around six projects in the year 2015 and ten projects in the year 2016.

Related: $20 oil is possible, says Goldman Sachs

Due to this huge transition, markets as a whole have seen a great shift in prices of various products. The market nearly lost as much as $2.05 trillion, which greatly affected the prices of different raw materials including oil and gas. According to chief market strategist Donald Selkin from the National Securities Corp. in New York City, the major blow was taken by the energy sector around the world. “The problem is their ability to pay dividends. That’s the question, as far as the valuation is concerned,” states Selkin.

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