If oil hit $50 a barrel, what would that mean?

Increasing abundance of black gold is a mixed blessing.

by Jack Torrance
Last Updated: 06 Jan 2015

A report by Bank of America claims that crude oil prices could fall to as low as $50 (£32) per barrel in the near future, thanks to the declining influence of the intergovernmental cartel Opec, according to the Telegraph. That would be a boon to most businesses and consumers, but is a big threat to cost-intensive shale oil producers whose break-even point is much higher than those with more basic operations.

In the future prices will be set by the free market, meaning higher volatility – manageable if you’re a wealthy Arabian state with lots of cash reserves, not so if you’re a fringe producer like Venezuela or Nigeria, heavily reliant on oil for economic growth. Falling oil prices have already caused trouble for Russia – the rouble dropped by its biggest daily amount in more than a decade last week after Brent Crude fell to a five-year low of $67.50.

Consumers are likely to benefit of course. Goldman Sachs economist Kevin Daly told MPs yesterday that prices at the pump could fall as low as £1.05 per litre if oil fails to rebound, the lowest level in five years. The knock-on effect of this is also a bonus – any business reliant on hauliers or air travel could see its costs reduced. If prices of $50-$70 become the new normal then the price of most goods would be expected to fall.

There's no doubt this must be a blip to some extent though. At the fundamental level there is only a limited supply of oil and this current excess of production won't last forever - the question is how much of a problem it can cause while it sticks around.

The biggest threat though is to those oil firms with fracking operations, particularly in the United States. Once hailed as a way to break America’s dependency on Middle Eastern oil, shale’s relatively high production costs relative to the price of oil means what looked like a good investment when oil was more than $100 a barrel probably doesn’t anymore. Expect Government intervention if it looks like US oil energy independency could be threatened.

While the big beasts like BP and Shell can afford to play the long game, smaller exploration firms that are particularly dependent on fracking could be left up crude creek without a paddle.

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