Globally, oil production keeps outgrowing consumption. The second quarter of 2015 averaged 2.7 million b/d in global oil inventory, which represents a significant rise by 0.8 million b/d compared with the first quarter of the year.
According to World Bank, crude oil is expected to sell for about $57 per barrel. This represents a sharp drop in the price of oil especially considering that in May 2013, crude was sold for $94.50 per barrel.
The oil industry forecast is very much different today from what was obtainable a few years back when the industry was largely influenced by cartels. Today, with the systematic structures put in place, oil production continually surpasses its consumption which has led to drop in oil price globally.
Heavy export, urbanization and alternative energy sources
Russia, which is the second largest oil-exporting country after Saudi Arabia, is forecast to have a stable oil market and a growth in demand for other commodities exported by the country. However, political instability may adversely affect investments, increase capital outflows and invariably affect the Russian rouble.
Nevertheless, urbanization, which is another interesting demographic trend, is expected to positively increase the demand for energy consumption. About 1.7 billion people are expected to migrate to urban areas which mean improved access to commercial energy and significant reduction in energy poverty.
The United States is expected to lead the way in the forecast mainly due to its ability to recover relatively faster than other economies, with the support of growth-friendly money policies by the central bank.
On the other hand, the financial crisis in Europe, slower growth in China, strict regulations on fuel economy, more efficient kinds of energy alternative and the creation of very efficient engines on cars, airplanes, power plants etc, have all come together to drastically reduce the demand for oil.
The increase in oil supply doubled that of consumption which led to price reduction and less profit for oil giants like Shell, Chevron, Total, BP and ExxonMobil. Considering that billions of dollars were invested in while exploring oil by these oil giants when prices were still high, they were unable to reap the profits expected.
How can we adjust to this new reality?
Oil producers need to focus more on pushing capital and operation effectiveness in order to maintain their margins and preserve the rate of reinvestment needed for growth in production.
More firms are leveraging developments in technology like analytics, robotics and digitization to maximise production (increase efficiency) with less capital (reduced costs).
In addition, oil producers need to thoroughly examine their portfolios in various fields and make sure it is profitable for the company.
Conclusion
Focusing solely on how to reduce costs and spending isn’t the long-term solution for the downward trends in global oil. Oil firms need to carefully consider their assets supply, analyse the logistics of entering new and available markets and make sure they maintain long-term presence in these markets instead of trying to outbid one another.
The oversupply of oil globally and reduction in prices is very challenging to the industry, it does not however mean that the future is gloom. It simply means that producers should be better prepared, innovative and able to adjust to the new reality.
[Photo used for the featured image: “derricks” by Pay No Mind, used under CC BY-NC-ND]