The price of oil was once seen as a one-way bet. On the face of it, the view seemed quite plausible. After all, oil is a finite resource, which means that once it’s gone, it’s gone. Additionally, since most of the easy-to-reach oil has already been extracted, the stuff that remains under the ground could be more expensive to extract. So if global demand for oil continues to rise, then it is perhaps plausible that prices have to go up too. A new kid on the block But things have changed in recent years. A new source of oil, namely…
The price of oil was once seen as a one-way bet. On the face of it, the view seemed quite plausible. After all, oil is a finite resource, which means that once it’s gone, it’s gone.
Additionally, since most of the easy-to-reach oil has already been extracted, the stuff that remains under the ground could be more expensive to extract. So if global demand for oil continues to rise, then it is perhaps plausible that prices have to go up too.
A new kid on the block
But things have changed in recent years. A new source of oil, namely shale oil, has been discovered in great abundance around the world. The oil is trapped in rocks under the ground and explorers are keen to get their hands on it, come what may.
There are a couple of problems with this new-found wealth, though. Firstly, existing oil producers don’t exactly relish new entrants spoiling their party. The second problem is that shale oil can be quite costly to extract. But provided the cost of production stays below the current market price of oil, then extraction should still be viable.
When oil was selling at $100 a barrel, shale oil extraction was profitable, given that the cost of production is reckoned to be around $80 a barrel. But at below $80 a barrel, some producers could find that their projects are no longer viable or economical.
Currently, oil costs under $90 a barrel, though it could go lower. The precise reasons for the fall from over $100 a barrel is unclear. Conspiracists reckon that Middle East oil producers might be slashing prices to deter new entrants.
A tiger in my tank
Economists, on the other hand, believe that it is simply a function of supply and demand. Whatever the reasons, motorists and homeowners could be delighted by the drop in oil prices. It means lower transportation costs and smaller energy bills, especially those who like to have their air cons running at full blast, day and night.
The sentiment could be shared by heavy users of fuel such as Singapore Airlines (SGX: C6L), where fuel can account for nearly two-fifths of operating costs. And in the case of Tiger Airways (SGX: J7X), fuel and oil makes up almost half of the cost of operation. Other heavy users of fuel, which could benefit from lower oil prices, include bus and taxi operator ComfortDelGro (SGX: C52).
Elsewhere, travel agencies could see a healthy interest from prospective holiday-goers, particularly if the cost of going abroad is reduced. Shopkeepers, and in particular supermarkets, such as Sheng Siong (SGX: OV8) and Dairy Farm International Holdings (SGX: D01) could benefit from the drop in oil price too.
At a superficial level, retailers could gain from lower transportation and delivery costs. At a deeper level, their customers could see an improvement in discretionary income, thanks to lower, non-discretionary household bills.
But not everyone will welcome lower oil prices. Oil and gas companies, especially the oil majors are unlikely to enjoy seeing the price of oil drop below $100 a barrel. Smaller oil explorers could also find lower oil prices unpalatable. It might even drive a spate of consolidation within the industry.
Meanwhile, energy providers such as Sembcorp Industries (SGX: U96) could be prompted to cut prices to reflect the lower cost of electricity generation. Banks such as DBS Group Holdings (SGX: D05) might also be pushed onto the back foot.
In the main, banks that also include Oversea-Chinese Banking Corporation (SGX: O39) and United Overseas Bank (SGX: U11) would ideally like to see higher base rates to bolster their net interest margins. But lower oil prices could scupper the prospect for interest rate hikes by dampening inflationary pressures.
The cut in oil price by major producers was unexpected but not altogether unwelcome. By slashing energy prices, oil producers have effectively transferred money from their pockets into the wallets of consumers around the world.
There are many more of the latter than the former. Consequently, with more discretionary income, consumers with more money in their pockets could be just the spur that is needed to kick-start economic growth around the globe.
For some it could mean more money to spend. But for me, it means more money for me to invest. It could for you too!
A version of this article first appeared in The Independent on Sunday.
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