Monday, December 15, 2014

OIL PRICE DROP, A SIGN OF WORLD CHANGE

Last week the price of oil fell to its lowest in five years. By the time of writing US oil had fallen to $62.21 a barrel. In June it peaked at $107.64. Each barrel contains 159 liters.

This dramatic collapse has come despite disruption to production in Libya and Iraq, sanctions on Russia and disturbances in Syria affecting supply routes.

Traditionally oil prices rally heading into the northern hemisphere's winter season but for the first time since 2008, the year the global financial crisis exploded, this year is the first time that oil prices have fallen in the lead up to Christmas.

According to the economist four factors explain the downward dip in oil prices. 

One, economic activity in the the developed north is still low, as they try to shake off the hangover from the global financial crisis of the last decade so demand for oil similarly low. 
 
Secondly, despite trouble in Iraq and Libya which account for a combined four million barrels a day, they have held production steady. 
 
In the last year the US has become the world's biggest producer of oil with its advances in extracting l from l bearing rocks. While it doesn't export any it has reduced its import volumes creating more supply on world markets. 
 
And finally last week the Organisation of oil producing and exporting countries (OPEC) voted not to curb production, which would have pushed prices up.

"The biggest winners will be countries with huge oil import bills. It has been reported that China is taking advantage of the situation to beef up its reserves.

The biggest losers are. The oil exporting countries that rely heavily on oil to support their budgets...

In this respect is Russia and Iran, which are already staggering under international sanctions, Iran for instance needs oil to be at at least $130 a barrel to balance its budget.

For Uganda its a double edged sword. Our oil imports account for about $2b (shs5.4trillion) annually and this would do wonders for us if our oil bill fell by 40% in line with world oil prices.

On the other hand this new development may force a rethink by investors looking to invest in our oil industry. Already the cost of extracting our oil which is waxy and needs a lot of heating to keep it fluid during transportation, makes it expensive to produce. And that is without factoring in the more than 1500 km from our oil fields in western Uganda to the coast.

Big commitments in exploration and other preparatory work means plugging the wells and leaving is not an immediate option but a wait-and-see approach may slow down investment in the industry.

Thankfully the revenues from oil have not been factored into our budgets yet, but a huge infrastructural developments we are planning like power dams and overinflated standard gauge railway line were pegged to an eventual production of oil within the next five years.

Industry players are not being forthcoming with possible changes to their projections or how badly oil price fall affects our prospects but it would only be common sense to put the brakes on our grand designs for the moment.

On the global scene with the US more confident about its oil supplies what will that mean for their determined presence in the Middle East? The Middle East assumed new importance with the fall of the Shah of Iran in 1979. Within weeks of his overthrow oil prices jumped to $17 a barrel (the good old days) an almost doubling from about $10 at the start of the Arab oil crisis in 1974.

With the loss of a major ally in the Shah the US has not been averse to intervening in the Middle East to ensure the continued supply of oil.

Beyond just unhampered supply is the fact that the US dollar is backed by oil. All oil contracts are denominated in dollars, so if oil reserves fall in the wrong hands the US economy would be in mortal danger.

The conspiracy theorists suggest that this fall in oil prices is a deliberate effort, beyond the fundamentals outlined above, to bring Russia to its heels. Last week's refusal by a Saudi Arabia to cut exports was their final confirmation.

A shift in world geopolitics is happening before our eyes which could see tensions flare up in the Middle East as long held grudges, suppressed by US backing of unpopular regimes, bubble to the surface as America's interest in the region wanes.

For Uganda its not inconceivable that we might have to wait a little longer for our own oil production to start.

1 comment:

  1. eToro is the #1 forex broker for rookie and professional traders.

    ReplyDelete