Is crude price decline good or bad? – Energy Economics 102!! - Part 2

Continuing the discussion from the previous blog (Is crude price decline good or bad? – Energy Economics 102!! ), now that the decline in crude is seeing no decline, what next??

a) Acquisitions have become active... First the deal between Baker Hughes and Halliburton. Now the talks between Shell and BP. Wonder why Exxon is lying idle!!

This was bound to happen, as companies continue to fight for survival due to working capital issues and also to increase their revenue. This is the right time for big fish eating the small fish.

b) Social Planning: Many countries, especially the Opec ones derive much of their revenue from crude oil exports. The decline in crude prices have reduced their GDP by multiple basis points. Below is a chart that explains some of the impacts:

Source: World Bank, Oil Rents (% of GDP)

As you can see, the crude prices have reduced some of the least developed nations into a state of disarray. Countries like Saudi Arabia where oil revenue subsidizes all the activities, such huge decline will impact the structure of the economy itself. Probably more arab springs!!!

c) War: Hopefully lesser aggressive postures by crude exporting nations. The crude importing nations have more money to spend on wars. But hopefully violence due to aggressive pursuits may reduce.

c) Terrorists: Similar to the net crude exporting nations, Terrorist agencies like ISIS rely heavily on crude sales. ISIS makes around $3 mn per day on oil sales alone. They would have already seen their coffers filling 20% lesser. Hopefully this decreases their aggression. Unfortunately, for the same reasons more people from the countries affected by crude decline, may feel inclined towards joining these terrorist organizations. These agencies may offer an abode to many, indirectly relating the western aggression to the state of affairs and thereby luring them into the disturbing practices.

d) Infrastructure: Does it leave any chance for infrastructure expansion. Nope. No more pipelines, no more LNG plants. And what about the ones who are half way into implementing these capital projects. Pipelines like Keystone elsewhere in the world may not see the light of the day. Major LNG plants planned by Indian and Asian companies may start questioning their viability. 

On the contrary, it is probably the right time for countries to invest in Strategic petroleum reserves (SPR). India has been planning SPR for quite some time, but the decline in crude prices rightly increases the need for SPR or building the SPR equivalent storage mechanisms in shorter span.

e) Shale: Leave aside US, which has already invested so much in Shale. What about countries planning to or are in the early stages of development of shale gas. It'd become increasingly tough and unviable to invest in shale gas developments. Investments in this sector will be little leading to a decline in potential exploration opportunities.

f) Sustainability: Sustaining the sustainability across the world will become a huge issue. The incentive to shift to renewable went down and the emission reductions, if any, that were happening across the world have paused. 

The impact of these would be tough to predict at this juncture, but it is going to impact quite hard. When... leaving it for your own judgement!