Oil Price, Recession: Causes, Issues and Risks

As one of many whose bread and butter is in the oil and gas industry, the price of oil further plunging to around $41.35 dollars a barrel conjures a worrisome landscape. Today’s decline (August 14, 2015) is almost a full $3 decrease from Friday’s figure, a six-year low (Figure 1). Yesterday’s price was another low at $42.12 a barrel which is another 6Y low in less than two weeks with today’s low of almost a full dollar increment in just a day. Where are we heading now? What is the future of Alberta’s Oil Sand?

Figure 1-WTI Oil Price (2011 to 2015)

This continuing overall trend has now increased the probability that the grim economic projection made in 2014 by several economic soothsayers has really started and gaining momentum. These financial experts predicted that the worst financial crisis known to modern man is bound to occur in the later part of 2015 and through 2016, well into 2017. Similar projection came from known economic analysts who claimed to have accurately predicted the 2006 American real estate collapse and the 2008/2009 worldwide economic downturn.

The certainty of oil breaking below the $40 mark is now very high (we are almost touching it), below $35 is high, and below $30 is medium, taking the price momentum as indicator; driven by a more divided world.

There is a period of disengagement between major oil producers as they jockey their own horses to alleviate their individual government deficit. Oil produced from foreign oil powers have continuously find their way to North America because of their relatively lower cost, that is, despite transportation risks that accompany them. The future landscape is looking more formidable and scarier.

The world’s oil cartel refuses to cut back on production in an effort to maintain market share rather than strengthen prices (Berthelsen, C., 2015).

All related events that we see now, follow similar patterns of events in the past that can be valuable risk indicators. The issue of oil price steep dive is one of them ushering financial and social risk on the horizon. We do not need the Bank of Canada to declare that we are now in a recession. We know we are! Acceptance is the beginning of awareness but does it make us feel better?

The issues of today can easily generate the risks of tomorrow (Frago, R. (2015).Risk-based Management in the World of Threats and Opportunities). Complex as it seems, it is simply the law of supply and demand in an unpredictable, volatile global geo-political environment.

Here are the some of the root causes of the oil price plunge.

  • Uncontrolled oil production of major oil producer (even OPEC was reported not seeing eye to eye) resulting in over-supply (glut)
  • Several major refinery shutdowns (increases pump prices and puts crude oil on queue further feeding the glut)
  • Not enough refineries to process oil (throughput capacity not enough)
  • Iran’s potentially returning in full to the market (considered to be 2nd or 3rd biggest oil producer after Saudi Arabia before the last sanction took effect). Knowing the possibility that the lifting of sanction will take effect soon under the complacent watch of the present US Administration, Saudi Arabia and other Gulf States are pumping their oil in advance to capture all of Iran’s possible and would be market shares. Who can really say whether it is not what’s really happening now?
  • Too many O&G growth projects worldwide (many have shelved theirs but this will not address today’s concern)
  • Large hoarded oil inventories got caught in the glut and nowhere to go
  • Reported ISIS control of several oil fields (selling at very low price in the black market)
  • Adding fuel to the commodity price meltdown was the unexpected decision by the Chinese Central Bank to devalue the yuan by two per cent overnight Monday, August 10, 2015 (Yedlin, D., 2015.Calgary Herald).
  • Lack of oil transport infrastructure (Key stone pipeline still in limbo with materials now rotting away)
  • Lack of constructive political engagement everywhere even in Alberta (Obama, a democrat and Harper, a conservative, could not strike a deal. Now that the USA, supposedly the closest Canadian trading partner and allies seems to be heading to a Republican sweep next year, Canadians might end up voting for the NDP. This is not to mention that Alberta is now under the NDP watch after the governing Tory made the greatest political blunder in the history of the province. What a mess!)

Hedging protection of some oil players will soon expire and companies that do not have a complete oil & gas portfolio will soon buckle for eventual take-over. As producing companies and even attractive unfinished projects becomes available for low cost acquisition, large companies will opt to shelve theirs in favor of the more inexpensive take-over.

This scenario will become more and more a reality in Canada where oil production is relatively more expensive compared to conventional method used by competitors. As the oil price heads to cut into the breakeven point, then there will be some drastic decisions in the making.

To many still employed and enjoying the many of life’s comfort, the Sword of Damocles is upon us. Many of our peers have gone without work for months. So how does one prepare for more threats to come? How do we mitigate the impact of the financial risk that this oil price brings? Do you have any suggestion?

On a positive note, investors and companies should remind themselves that the issues of today will pass in due time. It is the principle of change. Nothing in this world remains the same. We only sometimes think they are, but they are not. All investments look at the future prospects. While things are down today, the profits are for the taking years down the road. In the midst of the threats before us are opportunities. As the saying goes, “every cloud has a silver lining.”

Wisdom to remember: “A good and balanced decision maker is not driven mainly by the happenings of today, but more on the prospects of tomorrow (Frago, R., 2015.Draft Manuscript-The Future of Canadian Business).”

Rufran (081415)-Author (The above article was first published in LinkedIn Pulse, 081415)

Other articles authored by Rufran Frago:

  1. Risks Surrounding Canada’s TFW Part 1
  2. Risks as a Function of Time
  3. Project Schedule: P50, Anyone?
  4. Changing the Culture of Your Organization
  5. A Person Perceives Others Based on His Own Interest
  6. How Can Management Motivate and Empower?
  7. How Can Managers Increase Leadership Effectiveness
  8. Risks Surrounding Canada’s TFW Part 2
  9. Scaffolding Hours: What are they? Directs or Indirects? Part 2

ANNOUNCEMENT! The paperback and Kindle edition of the book “Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective” are now available. Please follow the hyperlinks for more information.

The book provides new/additional knowledge to project management practitioners (beginners to experts), risk management specialists, project controls people, estimators, cost managers, planners and schedulers, and for students of undergraduate courses in Risk Management. The sectional contents offer practical and common sense approach to identifying/managing risks. It is a must have for company managers, directors, supervisors, aspiring industry professionals, and even those students fresh from high school. The material is especially design to start with the foundational principles of risk gradually bringing the reader to deeper topics using a conversational style with simple terminologies.

So, if you are interested, check it out!

https://youtu.be/wxWgYUhiWos

Source: Frago, R., 2015.Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective

https://www.amazon.com/author/rufrancfrago

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About rcfrago

Rufran C. Frago is a practicing Professional Engineer (APEGA), a PMP (PMI), a CCP (AACE) and a RMP (PMI). He has published more than 100 articles. He is the author of the book Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective He studied at Batangas State University and University of Batangas graduating with a Diploma in Petroleum Refinery Maintenance Technician (1979), Bachelor of Science in Mechanical Engineering (1984), and Bachelor of Science in Management Engineering in 1987 respectively. He was in his senior year taking up Bachelor of Science in Electrical Engineering, needing only one semester to complete, when he took a break to concentrate on married life. Rufran has never stopped academic learning after getting his degrees in the University. He continues his education by taking up some MBA courses under the University of the Philippines-PBMIT Consortium (1987-1988). He completed Computer Technician Program at International Correspondence School, Pennsylvania, USA in 1994, Applied Project Management Certificate program at Southern Alberta Institute of Technology in 2009, and Professional Management Certificate program specializing in Construction Management in 2014. He is now completing the Professional Management Certificate program specializing in Risk Management. He was a recipient of the Gerry Roxas Leadership Award (1976) and the American Field Service (AFS) Scholarship in 1976-77, studying in America for a year. Upon his return in 1977, California-Texas Philippines (Caltex Philippines Inc.), one of Asia’s biggest oil and gas refineries at the time, awards him with a two-year national college scholarship, specializing in Petroleum Refinery Maintenance. He went on extensive training in various maintenance disciplines for the next two years. Caltex hired him upon his graduation in 1979. He has spent more than 38 years of his life working in the Oil & Gas, Petrochemicals, Oleo-chemicals, Sugar Refining/Manufacturing, Consultancy, High School and University Education industries in Asia, Middle East, Canada, and North Africa). Rufran has worked with Caltex, Uniman, Unichem (now Cocochem), ARAMCO-KSA, Central Azucarera de Tarlac, Arabian Gulf Oil Company-Libya, Batangas State University, St. Bridget’s College, JG Summit Petrochemicals, Halliburton-Kellogg, Brown and Root, and OPTI Canada. He works with Suncor Energy Inc at present. He has wide range of expertise that includes problem solving, project management, training and mentoring, programs and projects planning and scheduling, cost management, risk-based management, construction management, project review and auditing, estimating, engineering and design, fabrication and module management, maintenance, operation, material selection, warehousing, EH&S and reliability engineering (predictive and preventive maintenance). He wants to share his knowledge and leave behind some form of legacy to all specially his wife, children and grandchildren, Eva and Mia.
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