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Oil slump – the true cost of falling prices

Oil industry effects

Up to 65,000 jobs have already been lost from the British offshore oil industry since the cost of crude fell from a peak of $115 per barrel in June 2014 to its latest level of $30. A further decline to $10 would clearly turn a cull into a massacre, not least because the North Sea is a high-cost place to operate, with the break-even price for many fields around $60.

Just last week BP unveiled plans to axe a further 4,000 jobs – most over the next 12 months – with 600 of them in Aberdeen. Shell has promised to cut 2,800 if, as expected, its merger with BG goes through in the next few weeks.

Around the world, 68 oil projects with a combined investment cost of $380bn have been dumped over the last year, according to Edinburgh-based global oil consultancy Wood Mackenzie.

Thirty-seven North American oil and gas producers have filed for bankruptcy, says Texas-based law firm Haynes and Boone, while analysts have warned half of US shale drillers could be out of business if the slump continues.

Dividend payments from Shell and others could be slashed if oil skids further and a major new round of takeovers would almost certainly begin. Sub-$10 oil in the late 1980s led to BP buying rival Amoco for $42bn and a series of other mega-mergers as companies sought to bulk up while cutting jobs and offices.

Consumer effects

Motorists have already benefited from lower petrol prices, which are now below £1 a litre in some places – but they still do not reflect the true cost of supplies, and $10 oil would bring more benefits.

The last time that price was reached – during the height of the Asian financial crisis in 1998 – petrol prices fell to around 86p per litre. Oil companies argue that the vast majority of the petrol price is made up of taxes but a further collapse in crude values would produce a glut of cheap refined products and pressure to pass on cuts.

Many international gas contracts are also tied to oil prices, and wholesale prices have fallen by at least 30% over the last 18 months. These lower costs have not been fully passed onto householders. Energy regulator Ofgem said on Friday that the “big six” UK suppliers are overcharging “for the vast majority of people”.

Despite the growth in wind and solar for providing electricity, gas is still the key fuel for energy generation, whether in the home or the power station. Even without lower crude prices, there have been growing expectations that power prices will at least remain flat from now until the end of the decade.

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The economic effects

A fall in the oil price is the same as a tax cut for consumers. It means they have more to spend on other goods and services, though there is some evidence that UK car owners are spending some of their windfall on extra petrol as they increase the miles they drive.

A slump to in the oil price to $10 will not mean a big fall in pump prices because of the tax levied but businesses will get a big lift from cheaper oil products. It cuts the cost of transport and there are also benefits from cheaper plastics, fertilisers and synthetic fabrics.

The downward pressure on inflation will persuade the Bank of England to keep interest rates lower for longer. That is bad news for savers, but good for mortgage payers and high-street spending.

The government’s hope will be that consumers spend more on goods and services produced by UK businesses, boosting growth. But Britain is an open economy, with trade accounting for around a third of economic activity, so if extra cash goes on imports it will widen the trade deficit.

Scotland will suffer as more oil firms pull out of North Sea production or lay off staff. From the Treasury’s point of view, the bad news is the big loss in tax revenues that inevitably follows, though this should be compensated by tax receipts from a higher growth rate.


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