What Are the Pros & Cons of Plummeting Oil Prices?

Over the coming months, the price of petrol is expected to fall to close to £1 a litre if the price of oil remains low. Senior economist for Goldman Sachs, Kevin Daly predicted that prices would fall from the current average of 120 pence per litre by 15 pence. This may bolster consumer confidence, but the entire industry will be transformed globally if oil prices continue to drop.

While lower petrol prices is of course a benefit to consumers, how will the oil industry respond if the price of a barrel continues to plummet beyond the current 40% drop the industry has experience since June 2014?

Oil company mergers and closures

With the American multinational financial services corporation, Morgan Stanley forecasting that the benchmark Brent crude will average at $70 a barrel next year, oil companies worldwide are creating contingency plans in preparation for what might be a tough year for the industry.

Larger companies such as BP are likely to withstand long-term price falls, but analysts are predicting a series of mergers, acquisitions and rescue deals for businesses with smaller budgets. It is expected that drilling projects and new explorations will be suspended if oil prices continue to decline.

Daniel Yergin, author and one of the oil industry's leading authorities spoke of the plummeting oil prices in the Wall Street Journal: "Even before the collapse in prices, major oil and natural-gas companies had become preoccupied with the continually rising costs of developing new supply and were heeding the call from investors for 'capital discipline'.

"This price decline will turn this preoccupation into an obsession. The result will be a slowdown and reduction in major new investments around the world."

Sector recession

It is also believed that the service sector that provides drilling equipment, rigs, and comprehensive support to the oil companies will feel the hit of the low oil prices.

In November, two of the sector's largest service companies, Halliburton and Baker Hughes revealed they had discussed merging. Shares in Halliburton have been particularly low due to fears that the company may face declining revenues and fewer contracts in the year to come.

Robert Perkins, an oil expert at the industry information and news organisation, Platts confirmed that service companies were reporting a decline before the recent fall in oil prices. A merger deal between Halliburton and Baker Hughes was drawn up extremely quickly within weeks, instead of months as is usual for merger deals. "It is a sign of the times in the sector," said Robert Perkins. "The service sector has been in decline since last year."

What will happen if oil prices continue to plummet?

While it's hard to predict the exact outcome if prices continue to drop, it is clear that the industry’s landscape will change drastically. Senior analyst covering oil at Oppenheimer and Company, Fadel Gheit, spoke with the BBC, claiming that prices would need to drop significantly to force oil producers in the US to shut down business.

"Five years ago the industry required about $90-plus per barrel of oil to invest in new projects, but today this number is close to $60 or $65 per barrel." That's because of efficiencies brought about by improving technology."

What Next?

For further reading on this topic, take a look at how the crude oil market works or why the oil prices are dropping.