Spring Break
Crude Realities of a Hot Commodity
Lily-Hayes Kaufman (OI)*,Contributing Writer
Issue date: 11/10/08 Section: Viewpoints
Even the oil majors, the easy targets of "excess profits" accusations, are doubly feeling the pain. As a result of impact of oil's fall from grace coupled with the credit crisis, capital expenditures may outpacing capital inflows. That certainly doesn't sound like excess profits to me. While the value of oil pumped from the ground declines as oil pulls back in the market place, the cost of financing projects increases as the credit environment continues to worsen.
Uncertainty across capital markets impacts the cost and available liquidity sources. If the capital market liquidity window closes further, drilling in the following years may be significantly revised lower as projects lacking funding do not come to fruition.
Another limiting factor to future production, the Organization of Petroleum Exporting Countries is keeping a close eye on oil's decline. On October 24th, concerned about oversupply in the face of global slowdown, OPEC released the following public statement: "Oil prices have witnessed a dramatic collapse - unprecedented in speed and magnitude - falling to levels which may put at jeopardy many existing oil projects and lead to the cancellation or delay of others."
But even the organization's decision to reign in 1.5 million barrels per day seems to have done little to stop oil's slide.
Clearly, dropping oil prices have a very tangible result for the every-day American consumer. As prices move towards $50, $3.00 gasoline looks like a steal, heating costs should be lower this winter, food prices globally should decrease, shipping costs should contract and even airfare should pull back.
Just about every cost one can imagine should in theory decrease as fuel prices decline. But then again, isn't this a symptom of recession?
In fact, fuel prices gave up an additional 9% in response to the most recent report from Institute for Supply Management (ISM). At 38.9, the manufacturing index is well below 50, a level generally accepted to signal economic contraction. The last time the index dropped this low the US was in the midst of recession in the third quarter of 1982.
Uncertainty across capital markets impacts the cost and available liquidity sources. If the capital market liquidity window closes further, drilling in the following years may be significantly revised lower as projects lacking funding do not come to fruition.
Another limiting factor to future production, the Organization of Petroleum Exporting Countries is keeping a close eye on oil's decline. On October 24th, concerned about oversupply in the face of global slowdown, OPEC released the following public statement: "Oil prices have witnessed a dramatic collapse - unprecedented in speed and magnitude - falling to levels which may put at jeopardy many existing oil projects and lead to the cancellation or delay of others."
But even the organization's decision to reign in 1.5 million barrels per day seems to have done little to stop oil's slide.
Clearly, dropping oil prices have a very tangible result for the every-day American consumer. As prices move towards $50, $3.00 gasoline looks like a steal, heating costs should be lower this winter, food prices globally should decrease, shipping costs should contract and even airfare should pull back.
Just about every cost one can imagine should in theory decrease as fuel prices decline. But then again, isn't this a symptom of recession?
In fact, fuel prices gave up an additional 9% in response to the most recent report from Institute for Supply Management (ISM). At 38.9, the manufacturing index is well below 50, a level generally accepted to signal economic contraction. The last time the index dropped this low the US was in the midst of recession in the third quarter of 1982.
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