To say the global oil industry has had a turbulent year would be an understatement. The industry has been thrown into a violent tailspin, which has culminated in oil trading for under half the price it was fourteen months ago. While the initial cause of the crash was oversupply, several recent international developments, including the Chinese market downturn and the proposed Iran nuclear deal, have only accentuated the demise. More information about the underlying causes and the current state of oil prices can be found in previous globalEDGE blog posts containing the Oil tag.
This post, however, will focus on how the oil industry in the United States is responding to this new landscape, and what effects this will have on the rest of the industry and the global economy. The first way that the sector has responded is by innovating and developing new ways to drill wells both faster and cheaper. This upgrade in efficiency surprisingly came easier than was anticipated. David Tameron, a senior analyst at Wells Fargo, attributes this to the new pressure placed on companies by lower oil prices and a smaller profit margin. In an interview with The Wall Street Journal he stated that, “If you step back and think about what happens at $100 oil, you don’t have a lot of efficiencies. Everyone has so much cash it doesn’t matter.” Essentially, the trend among American oil producers is to compensate for the revenue lost to declining prices by pumping more oil out of the ground more efficiently. This trend will only enhance the current oil supply glut and could potentially cause oil prices to drop even further.
In order to relieve this supply glut in the United States, many oil companies, along with some key figures in the legislature, are supporting a move to open the U.S. oil industry to exports. The exporting of oil in the United States has been banned since the 1970’s, a policy that took shape following the 1973 Arab oil embargo. The rationale behind the ban is that by keeping as much crude oil in the U.S. as possible, the nation would not be as dependent on foreign oil and subsequently be “protected” from the volatile global markets. The new argument for reversing this 40 yearlong ban is that “Allowing unfettered domestic oil exports would eliminate market distortions and streamline U.S. petroleum production.” The House of Representatives could be set to vote on this policy as soon as this September, and the bill could potentially reach the Senate by early 2016. While the reversal of this ban theoretically could help ease the oversupply domestically, what affect would this policy have on the global economy? The short answer is that, with current oil prices below $50 a barrel, the influx of American oil on the global market would not have much of an effect at all.