On Friday, Royal Dutch Shell announced that it would take a $1.7-$2.3 billion write down for the fourth quarter, another financial blow to an industry dealing with oversupply and low prices.
The write down is the result of the bad “macro outlook,” Shell said in a press release, which refers to the slowdown in the global economy, weak demand growth and relatively low prices for gas, oil and for refining margins. “Additional well write-offs in the range of $100-200 million are expected compared to the fourth quarter 2018. No cash impact is expected,” Shell said in a statement. The company’s share price in London fell 1 percent on the news.
Whilst some de-escalation in the trade war has taken place, the threat of a resumption of the war continues to cast dark clouds over the global economy. The oil market should be wary of President Trump’s tendency to change his mind suddenly vis-a-vis a rapprochement with China particularly in the aftermath of his impeachment.
As a result of a less buoyant macro outlook, major oil companies like Royal Dutch Shell, Chevron, Repsol, BP, Equinor and Halliburton have written down billions of dollars in assets. The case of Chevron is of particular importance. When major oil companies like Chevron and ExxonMobil moved into shale oil production, it was thought that their deep pockets and their more advanced drilling technologies would make a great success of it. Chevron is showing that major oil companies are not faring better than small independent drillers. They all share one thing: not producing profits.
The real lesson from the 2014 oil price crash and the developments that have followed since then show that while it is true that low oil prices could reduce the cost of manufacturing, thus helping the global economy to grow, it is a short-term benefit as this is vastly offset by a curtailment of global investment which forces companies around the world to cut spending, sell assets and make thousands, if not millions, of people redundant. It also forces the global oil industry to sell assets and the economies of the oil-producing nations to sustain huge deficits thus forcing them to cut expenditure and investment.
The global economy benefits a lot from a fair oil price. My research has shown that a fair oil price ranges from $100-$120 a barrel. Such a price range is good for the global economy since it stimulates global investments, enables the oil industry to balance its books and start financing new projects and also enables the economies of the oil-producing nations to invest in exploration and expansion of production and also balance their budgets.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London