The true price of oil

We have all seen the price of oil fall dramatically from over $100 to less than $50 a barrel and this is mainly due to supply being greater than demand. It seems the world as we know it likes creating mountains of produce, from cars, butter and now oil. Yes the price has rallied lately to over $50 a barrel but predictions suggest this is only temporary and a further fall is imminent. When I first started distributing oil in Uganda the price of a truck of petrol and diesel from Kenya was around £28,000 now it can be had for £17,000. This sound very good as I could almost buy two trucks for the same money increasing my profit margin, however the tax per litre has been increased thus making it more difficult to supply oil within East Africa. 

There are fundamentally two issues that need to be resolved within the East African petroleum markets, firstly is the continued increase in the price of oil and secondly how to expand the demand for oil. Demand can be seen as region specific and as someone who lives in Uganda the demand has always been high and will continue for many years to come. When you then compare African and Asian demands for crude oil against the West and in particular America, the requirements for energy and its consumption greatly differs.

People in the U.S, have not suddenly stopped using power or driving cars, but the energy they use is now very different as many campaigners have argued for cleaner and greener supplies of energy to replace fossil fuels. This has resulted in companies using alternative sources of energy and where fossil fuels must be used for engines, generators and power stations they have become more efficient requiring less fuel to run resulting in lower carbon emissions. This situation means the supply of oil is far too great for the major markets, which in turn drives the price even lower. 

The cost associated with E&P (Exploration and Production) are some of the highest in the petroleum lifecycle and must be recouped for oil producers to stay profitable and invest in the exploration of new oil wells. However a recent report showed that so much oil has been produced that storage is now becoming a primary issue. The longer a supplier has to store petrol and diesel before it is delivered to the customer then the higher the cost of oil will be at the pumps. However because supply has outstripped demand this additional cost has been swallowed up by the producer and not the customer, effectively becoming a buyer’s market and as car drivers rejoice at the lower cost of filling up their beloved vehicles we must remember that the lower price of oil will pose a risk to jobs. Simple economics state that if input (income) is less than your output (costs) then you make a loss and the easiest way to cut losses is to reduce the number of workers within your organisation.

Globally the way we use oil has shifted enough for prices to take a long term dip and the problem will only get worse as more countries join the green zone of economies. Unfortunately the price of oil at the pumps in Uganda has slightly increased due to underhanded measures of restricting supply causing a number of petrol stations to run out of fuel forcing an artificial demand to be greater than the available supply and elevating the price. It appears some of these oil suppliers have yet to learn the lesson of controlling the amount of crude they take from the ground. 

Considering the huge amounts of crude oil being stored I find it disgraceful that supply is restricted at point of sale to keep profits high. Oil suppliers need to wake up as this cannot continue and only makes the situation worse. The problem is compounded by many investment planners having put a lot of investors’ money into petroleum as a sure fire way to increase long term profits and you may think this will only hurt a certain number of private investors who have decided to take a gamble on the stock market. Unfortunately many pension plans are also in the hands of equity fund managers who as I said have played their petroleum card and put too many eggs into that basket. Therefore when the price of oil fell, so did the pension plans. If the price of crude goes as low as $20 a barrel, then a few analysts have predicted a financial meltdown. This may be no more than scaremongering but it will hurt in jobs linked directly to oil production, indirect employment necessary to keep supply and production operational and petrochemical sales.

There certainly has to be equilibrium in price, but how to achieve it is at the moment debatable and should not continue down this path to the extent of a petroleum depression. Yes rigs may need to be closed during the short term and jobs may be put on hold as petroleum stocks are used, but in the long term it will produce a healthier market that is hopefully not artificially inflated. I remember when car manufactures made too many cars and 1000s of them were stockpiled getting rusty because supply did not match demand, it caused a number of big U.S car manufactures to declare bankruptcy. Furthermore the price of oil must be sustainable; If we look at the football analogy do you think these premiership footballers are worth £200,000 a week for kicking a ball? No the price is artificial and has caused a number of UK football clubs to close due to lack of funds. Simply put petroleum and petrochemicals are tightly woven into the fabric of today’s societies and economies. If the pricing structures presently in place are not corrected then it creates a boom-bust economy which can and will destabilise emerging nations.