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Future imperfect

30th January 2015

By: Terence Creamer

Creamer Media Editor

  

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Aside from the horrific terror attacks in Nigeria and France, the precipitous fall in the oil price has been the main news story of 2015 so far.

The weakening has not only been steep; it has also been fast, with the rapidness of the change illustrated neatly in an article appearing in Bloomberg Businessweek’s special issue on the outlook for 2015. In a section on energy, the magazine ran a Q&A with Continental Resources CEO Harold Hamm, who leads one of the largest independent producers in the Bakken oilfield of North Dakota and Montana.

In the piece, which was published on November 6, Hamm was asked whether, given the extra expense of horizontal wells and hydraulic fracturing, Continental would be able to withstand the lower price outlook. His answer: “We’ve estimated where our break-even point is. I don’t like to talk about it a lot because, you know, let’s don’t get panicky, but we’ve got numbers out there about where Continental would break even. It varies by operator, but in the Bakken we’ve done the homework before and it’s $50 a barrel. I don’t think we’re close to that, and I don’t think we’re going to be close to that.”

By mid-January, however, the price had fallen below the $50 level and, at the time of writing, there were few signs of an imminent recovery – it should not be forgotten that a barrel of Brent crude was trading at $108 in January 2014, and the price reached its 2014 peak of $112 in June.

For South Africa, the more than 50% drop in the oil price over seven months has come as a windfall – petrol prices and inflation are falling, leaving consumers in a far stronger position than they would otherwise have been had the price remained stable.

However, it is not all good news. Much of the reason for the decline is the lower-than-anticipated demand outlook. This relates most directly, but not exclusively, to the slowdown in the growth outlook of the world’s most important oil and commodity importer, China.

However, the effect of China’s slowdown is not confined to oil – it affects just about every mineral and agricultural commodity, including ones mined and exported from South Africa and the rest of the region.

As a consequence, the International Monetary Fund (IMF) has again lowered its 2015 growth forecasts for South Africa, from an already anaemic 2.3% in October to 2.1% in January. The IMF is also forecasting a weaker growth rebound for commodity-exporting developing countries, including South Africa.

The fallout is also being felt directly in the energy sector, with price volatility and uncertainty identified as the leading concern confronting global and African energy leaders canvassed for the World Energy Council’s 2015 World Energy Issues Monitor.

More than 1 000 energy executives and policymakers from nearly 80 countries responded to the survey, which showed energy-price volatility to be the dominant “critical uncertainty” for every region.

Worryingly, it is also in this context of deep uncertainty that these leaders are going to be expected to make the investment decisions required to either sustain energy security, or to build it in those areas of the world where security of supply remains an objective rather than a reality.

Citizens around the globe can only hope that energy executives and policymakers do a better job in seeing through the haze than was the case in South Africa ahead of the current power crisis.

Edited by Terence Creamer
Creamer Media Editor

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