AN EXPLANATION INTO WHY OIL PRICES ARE SO TOPSY TURVY
For the first five months of 2018, the price of oil surged.
On Jan 1, 2018, oil traded at about $60/barrel. By mid-May, the price was over $72/barrel – a 20 percent increase which had local business people smiling from ear-to-ear at the idea that the area’s economic recession was all-but over.
But in late-May, the climate changed – at least temporarily.
And now, there is at least a small cloud of pessimism about what the future might hold in the coming months.
In late-May, the price of oil plunged from $72.30 per barrel on May 21 to $65.81 per barrel on June 1 – a nearly 10-percent decrease which has local eyes on the industry once more.
The cause for the drop is out of our control. It was sparked by international politics and an announcement by Saudi Arabia that they planned to partner with Russia and other OPEC nations to pump more oil into the market to boost the global supply.
If that happens, it’s bad locally because the Gulf-pumped oil would be less valuable and less profitable to produce.
But on the flip side, it would also likely drop the price of gas at the pump, which could bring savings to some locals who have been squeezed recently by prices which have crept near $3/gallon.
“It is the intent of all producers to ensure that the oil market remains healthy,” said Saudi energy minister Khalid Al-Falih, when speaking in St. Petersburg, Russia at a panel hosted by CNN. “If that means adjusting our policy in June, we are certainly prepared to do it.”
WHAT IT MEANS FOR OUR AREA
Everyone locally knows that the price of oil heavily dictates our local economy. By now, that is not a secret.
But not many understand what factors go into that price and why we are so dependent on the price to have a successful, flourishing local economy.
Oil is traded globally and only so many countries around the world produce it and take it to the global market. This creates a supply and demand market, which dictates the price.
When the United States, the OPEC Nations and others produce a glut of oil, there is an overabundance to buy in the market, which causes the price to drop. A lower price means that the profit margin to drill drops, which makes the process less appealing for companies in the Gulf of Mexico. Less incentive to deepwater drill means less offshore jobs. Less offshore work also means that the companies which support the oil and gas industry locally take a hit, too.
“It’s all tied together,” said LSU professor and well-known economist Loren Scott. “When the big domino falls, the other dominos around it fall with it. That’s the economic picture for you guys. This one factor dictates all others.”
But global leaders don’t want a glut in the global market, so efforts are made to try and limit the supply to create a fair price for all.
The reason why oil prices climbed over the past 24 months was because of a deal OPEC nations reached in 2016, which saw them limiting production to cut down on the global supply. When this happened, United States producers got busy again because less global oil meant higher prices per barrel and more profitable drilling.
A report by CNN this past week said that U.S. crude production has increased by 25 percent since the OPEC agreement. Local rig counts have continued to be on the rise, as well and the local unemployment rate has dropped significantly in the past 24 months.
The reason the price of oil has gone back down now is because of Saudi Arabia’s comments that the deal may soon be reversed, which would bring global conditions back to levels unfavorable for locals in the industry.
WHAT IS A HEALTHY
AND UNHEALTHY PRICE?
Everyone locally would love prices to test $100/barrel – if not higher – the prices that we enjoyed many moons ago when our economy was among the best in the world.
But that’s not always sustainable or feasible – an exception to the norm.
But local industry leaders say prices don’t have to be that high for business leaders to be successful. Global leaders say they would like the price to be between $60 and $70 per barrel – a price high enough to maintain supply, but low enough to deliver demand.
Locally, the recipe for success is about the same.
Port Fourchon Executive Director Chett Chiasson said the “sweet spot” is consistent prices that are about “$70, $75 or $80 per barrel.”
“With those levels, I think work will be consistent,” he said. •