The major drop in oil prices from $108 to $37 over the past 18 months is taking its toll on American producers. Many companies are faced with huge debts and several have filed for bankruptcy. Over 100,000 jobs in the U.S. oil industry were lost in 2015.
The price decline results from the slowing demand for oil internationally, especially in China whose stock exchange fell 7 percent after the Chinese government devalued its currency.
“The Chinese stock market continues to fall more than people anticipated. Clearly the oil market is going to be influenced by what we see in the stock market,” said Andy Lipow, president of Houston-based consultancy Lipow Oil Associates. “People are concerned this will spread around the world to have an even bigger effect on oil demand.”
There is also the relentless pumping by the world’s biggest oil producer, OPEC, who is fighting for its market share. The Saudi-based company is continuing with its production quota and refuses to cut back to lift prices.
Even worse, a new rival has emerged within OPEC. The Economist reported Saudi Arabia is considering an initial public offering of Saudi Aramco, a state-run oil giant that is likely to be the most valuable company in the world (its oil production is double its nearest rival’s and accounts for 10 percent of the world’s output). Even though the timing for an IPO would be poor with low prices, Saudi Arabia would not have much to lose given its economy increased its non-oil revenues by 29 percent. Not to mention it has the world’s biggest oil reserves second to Venezuela.
As a consequence, oil is under pressure because of a growing global glut. The crude market is hugely unbalanced.
The International Energy Agency predicts the glut to persist for most of the new year, but the U.S. oil supply is expected to decline in 2016 (though not enough to balance out the market).
Article written by HEI contributor Aliyah Cole.