Crude Price Drop: Are Low Prices Hitting the Oil Industry's Least Loved Beneficiaries?

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Researched by Industrial Info Resources (Sugar Land, Texas)--Even with the modest recovery today in the oil market, $47 per barrel is something that few thought they would ever see. The root of the low price, aside from traders selling off en masse in the classic economic depression model, is Saudi Arabia's (and by extension, OPEC's) decision to maintain oil production levels in the face of increased supply from the U.S. and Canada.

While the economic causes are discussed widely, there are other, geopolitical factors that must be taken into consideration when discussing the root and the future of oil prices. By maintaining low prices, multiple global economies are being heavily pressured. But undesirable elements in the industry are facing a much stronger pressure that the established and non-oil-bound economies, such as the U.S.

This pressure may help to flush out these undesirable elements, while helping to maintain stability in the Middle East.

The most common reason cited for why Saudi Arabia has elected to maintain production levels and drive down prices has been to maintain market share against the burgeoning U.S. oil and gas production market. However, the U.S. and Canadian economies are not bound as tightly to oil as are those of Russia, Iran or Venezuela. Also, North American crude oil has a far lower break-even price when compared to these countries. As such, it feels the pressure of the price drop far less, and thus can endure low oil prices for far longer.

The U.S. oil industry will feel the squeeze among the fringe elements: the fly-by-night drilling operations, or the inexperienced Houston dentist who buys a couple of drilling trucks to supplement his retirement. These elements usually introduce risk and can harm the oil industry through the drilling of subpar wells, which give credence to environmental activists' anti-hydraulic fracturing ("fracking") stance, thus further entangling the regulatory red tape through which midstream companies must navigate.

But in the Middle East, it is believed that the Islamic State (ISIS) has received massive amounts of funding through the sale of crude oil. With lower oil prices, ISIS revenues are negatively affected, which is a key element in stopping the encroaching force that sits so near the oil reserves of Iraq and Saudi Arabia.

Thus, keeping oil prices low for a period of time will make the oil industry inhospitable to speculators and fringe investors--and even terrorists--who can profit only when prices are high.

But the question remains: How long can the rest of the world endure these low prices?

Within OPEC, there are nations whose very infrastructure is tied to oil prices. Oil production is state-run, and profits are used to fund public projects. Without money from oil sales, public services that governments of these countries have promised their citizens may cease. Denying expected public services in countries with track records of governmental instability is a powder keg waiting for a spark.

So the low oil prices are a balancing act. Hold out for as long as necessary to excise the bad, but not so long that the good is weakened or killed.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.