Spend Matters welcomes this guest article by Diarmuid O’Donoghue of GEP.
As many countries prepare for Halloween celebrations globally, the implications of continuing low oil prices have certainly had many "spooked." Earlier this week, crude oil (the global benchmark) was priced at $46.96 a barrel, which is nearly 50% lower than this time last year. In 2015, the supply-demand imbalance was due to lower-than-expected world economic growth, and OPEC's continued refusal to halt production.
Who Are the Winners?
Global consumers: Anybody who drives a car or flies on airplanes, for example, is a winner, as lower oil prices are already translating into lower prices for gasoline and jet fuel. The near-40% drop in gasoline prices in the U.S. since the summer of 2014 is reported to be the equivalent of a $100 billion tax cut, providing much-needed relief while wages remain stuck. Airlines are happy about lower prices for fuel, which makes up 40% of their costs. For the first time in years, airlines can buy new planes, invest in new facilities and give bonuses to employees, while paying dividends to shareholders.
Who Are the Losers?
American oil producers: The American economy has struggled to recover in the last few years, but the exceptions have been oil-rich states like Texas and North Dakota, which have enjoyed low unemployment and strong real estate markets. This trend seems to be reversing with energy companies and other natural resource businesses in Texas eliminating tens of thousands jobs this year alone.
How many of these independent producers in the American heartland have cost structures that make them viable with oil prices in the $40s rather than the $100s? Only time will tell, but with the price of U.S. oil starting to draw close to the price of Brent, imports of crude oil are on the rise, which will increase pressure on these domestic producers.
The supermajors: Spending on new projects, share buybacks and dividends at four of the biggest oil companies known as the supermajors — Royal Dutch Shell PLC, BP PLC, Exxon Mobil Corp and Chevron Corp — outstripped cash flow by more than a combined $20 billion in the first half of 2015, according to a Wall Street Journal analysis. Unless oil prices recover sharply, it will take years for the companies to bring their spending under control because of long-term projects already in progress that can’t be put on hold easily.
Russia: Russia is a major energy producer and the falling price of oil increases the pressure on Russia’s economy on top of Western sanctions imposed after Russian aggression toward Ukraine. Russia’s economy loses millions of dollars for every dollar decrease in oil, which is slowly chiseling away at its global powerhouse stature.
The continuing downward trend in oil will remain a front-page story as the effects continue to ripple across the globe. With many analysts predicting future risks to crude oil prices, governments and oil suppliers alike will hope they are not haunted past the yearly Halloween festivities.
For more interesting thinking on procurement, visit the GEP Knowledge Portal.