‘You never want a serious crisis to go to waste.” Barack Obama’s former chief of staff Rahm Emanuel used this familiar aphorism when discussing the 1973 oil shock, and it applies again now. But today’s crisis is the reverse – plunging rather than soaring prices. And of course what is a crisis for some is a mild inconvenience to others and an opportunity for still others.
In response to Opec's decision on Thursday not to cut production, oil prices plummeted. US crude was down a remarkable 10.2 per cent, albeit in thin Thanksgiving trade, while the UK's Brent dropped about US$2 to $70.45. The sharp falls were surprising, given that Opec's decision – or non-decision – had been fairly well telegraphed.
Prices may fall further, or may stage a modest rebound, but it seems clear that expectations of a new floor of $100 per barrel were misplaced. So what should producers, governments and consumers do in preparation for an extended period of weak prices?
Firstly, they should not think of current prices as “low”. Since the birth of the modern petroleum industry, the inflation-adjusted oil price has averaged above $70 for just 16 of 153 years. Prices in a range of $60 to $80 would be enough to keep oil competitive as an energy source and industry profitability still strong.
So if you are a government official, this fall should not come as a surprise. The wiser states have already been trimming their budgets; for others, the time of consequences is approaching. Cutting wasteful subsidies now makes even more sense – the required hike to reach market prices is less. Indeed, Indonesia and India are already taking advantage of the low oil prices as an opportunity to reduce subsidies.
Countries such as Venezuela, Algeria and Nigeria, which have in recent years specialised in repelling foreign energy investment, should reconsider. Lower oil earnings mean they need to sustain production while saving budget space for other spending that the government considers vital. As moderate prices make US shale projects less lucrative, the Middle East’s low-cost fields regain their attraction.
If you are an executive in an oil company, remember that the industry has overreacted to such boom-and-bust cycles so often before – overspending during the early 1980s in expectation of relentlessly rising prices, gutting research and the workforce in the 1990s, then suffering for it from rising costs and skills shortages in the 2000s, before repeating the mistake during the financial crisis.
Is it too much to hope for that this time may be different? Of course oil companies will seek to halt unprofitable projects and squeeze suppliers. When pay rates for cooks on offshore Australian platforms reach $445,000 per year, costs have to be realigned with reality.
But this should also be an opportunity to invest in technology and in building a younger and better-skilled workforce.
For the bolder chief executives, this is a chance to make acquisitions, such as Halliburton’s recent move for Baker Hughes, as valuations suddenly look more affordable.
The supermajor oil companies such as Shell may seek to fix their problems by delivering growth; the smaller independents may consolidate to build the scale to compete.
If you are an oil consumer – and it's hard not to be – lower crude prices may mean cheaper motoring. But it is not a bonanza or a licence to buy a gas guzzler. Most of the price at the pump in European countries reflects tax, not purchase of crude oil, while in the Middle East and Asia prices could even go up if governments cut subsidies.
Cheaper oil makes the climate challenge even more pressing – attention on low-carbon energy should not wander. From Russia to Saudi Arabia, the imperative of diversifying oil-dependent economies demands real action rather than rhetoric. And in these two areas above all, the opportunity presented by lower oil prices should not be wasted.
Robin Mills is the head of consulting at Manaar Energy and the author of Capturing Carbon
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