Current Location:Home > News > Industry News >

Oil Industry is in a Break.probably its Longest

Oil or rather the Crude Oil is actually a commodity or an share. Hence, prices of oil can tumble or reach sky high, by mere speculation of a person or an organisation. In the current oil market, there are three major types of oils; namely WTI (West Texas Intermediate), Brent Blend and OPEC Basket. Now just like a share in stock market, Crude Oil can also be sold at a fixed price basis in some future months using the Financial Instruments called Forward or Future. The most interesting part is that that these Financial Instruments are not usually used by major oil companies but by Trading Companies such as Glencoe, Vitol or Arcadia (to hedge position) or by Financial Institutions, such as Morgan Stanley, Barclays Bank or Louis Dreyfus (to arrange transaction) or by Investment Banks & Hedge Funds, such as Merrill Lynch, Prudential, Bache (for speculation).
 
The whole idea of oil price speculation could be quite overwhelming. In recent months, I have read a lot of speculation about oil prices, and frankly speaking, its hard, not to notice the seemingly obvious contradictions. In September, Goldman Sachs predicted that the oil price could go down as low as  US$ 20 per barrel whereas, Barclays just recently speculated a rather positive figure of US$ 60 per barrel. I am not sure, whether both of these speculations took into account the extra stocks of oil to be injected into the market by Iran, after the lifting of its sanctions. Regardless of the confusions,  I find the speculation industry or sector, quite intriguing, and believe this is where the actual story happens.
 
Another main reason which has directly affected the fate of oil prices until the 2008 crisis is Geo-Political. In the last 4 decades, the direct causes of 3 major oil crisis can be attributed to the Iranian revolution in the fall of 1978, Iraq’s invasion of Iran in September 1980, and Iraq’s invasion of Kuwait in August 1990. These crises shows the profound global effect of OPEC countries on the Oil Industry. Take the example of Yom Kippur War in 1973, wherein Arab countries of OPEC decided to cut 5% of exports every month until Israel evacuated the territories occupied in the Arab-Israeli war of 1967. Although, the effect was minimal compared to other geo-political incidents, it is still worth to note.
 
In USA, during the year 2007-08, the percentage of oil production to its consumption was only around 24%, on the contrary, in the year 2014, the trend was a complete U turn, out of the overall consumption only 24% of oil was imported from foreign countries. We are looking into a near future, where US will no longer be dependent on foreign oil imports. This is significantly because of Shale Gas revolution. Shale Gas, as the name suggest, is not only about the natural gas, its also very much about crude oil. This completely changes the whole global oil demographic, as it throws the whole idea of US Oil Foreign Policies into complete disarray. Although, this marks the beginning of a golden time for US Oil Companies, it simultaneously, signals trouble for traditional oil producing countries whose major chunk of GDP depends on its oil exports.
 
Apart from the rise US Shale Gas production, other major factors cited by experts behind falling oil prices are slowdown of big economy such as China  and Saudi Arabia's stubbornness on not decreasing its oil production.
 
Does this mean end of Oil? Its not.
 
You may ask, 'How can you be so sure?' The reason is simple.....Science. The hypothesis of Kardashev Scale, describes 3 (I, II and III) different types of planetary civilisation (although experts have now added two more categories, Type IV & V). In simple words, Type I describe the planet which can fully harness all the energy available through it's the nearby star, Type II planets can harness the power of the entire star. And Type III planets will have a civilization which will be in possession of energy on the scale of its own galaxy (OK I know what you thinking......but if you are really interested in Type III, then you must read Arthur C Clarke & Stephen Baxter's Time Trilogy novels). As per experts, we, or planet earth, are at 0.73 on the scale and we should achieve the Type I categorization in the next 200 odd years. So, in my strongest believe, it is inconceivable for mankind to reach Type I category, without phasing out its non-renewable energy sources, until the last drop.