Oil prices have been on a downward trajectory since the latter half of 2014, and that is bad news for anyone with a stake in future oil projects.
The long and nearly uninterrupted dip in oil prices led Goldman Sachs to evaluate the state of oil investments back in December. After studying 400 of the world’s largest new oil and gas fields (not counting U.S. shale projects) worth a combined $930 billion, the global banking firm discovered that less than 33 percent of these projects will remain profitable if oil stays at $70 per barrel.
Unfortunately for oil investors, it’s gotten a lot lower than that.
In October, Goldman Sachs analysts said oil will reach $75/bbl in 2015, prompting CNBC’s Dennis Gartman to declare that the oil era is coming to an end. By the first week of January, oil had dropped to $50/bbl – its lowest price since April 2009 – and, in the second week of January, it slid further still. Both Brent and WTI listed oil at $45/bbl.
Why is oil in free fall? According to Bloomberg, it is a combination of factors: U.S. shale oil has flooded the market, China’s demand for oil has declined and OPEC is refusing to halt production.
“We are not going to change our minds because the prices went to $60 or to $40,” Suhail Al-Mazrouei, the UAE’s Minister of Energy, told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.”
He added that OPEC would not even consider changing production rates for “at least a quarter.”
Oil prices go through cycles of boom and bust regularly, but this current slump could be different. The UN’s Intergovernmental Panel on Climate Change has called on countries to phase out all unregulated fossil fuels by the end of the century or risk catastrophic global warming. If low oil prices and political anti-fossil fuel sentiment combine, it could render hundreds of billions of dollars of fossil fuel investments obsolete, making them “stranded assets.”
Dennis Gartman certainly thinks that’s the way it’s going. “I think crude oil goes demonstrably lower over the course of the next several years,” he said on CNBC. “It goes the way of whale oil at the turn of the 20th century when crude oil came on line. Energies tend to be replaced, one, by a different type, and the old energy loses its value completely. Crude oil is going to go a lot lower. Who cares whether it goes to $50, $40. That’s not what’s important. The trend is clearly downward. Oil prices are going to go a lot farther down.”
Former vice-president and long-time environmental advocate Al Gore is also sounding the death knell for oil.
“Investors who haven’t yet come to grips with the stranding problem are like the classic scene in the Road Runner cartoons where the coyote runs off the edge of the cliff, and his legs keep moving for quite a long time before gravity takes hold,” Gore said in December. “There are investors out there whose legs are moving in mid-air.”
In an email to Bloomberg, Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy, said that oil and gas companies will make final decisions on 800 projects worth $500 billion later this year. If the price of oil averages $70 for the year, $150 billion will be pulled from global oil and gas exploration.
If it averages $65/bbl, it “would trigger the biggest drop in project finance in decades,” Bloomberg’s Tom Randall writes.