A Triple Play Threatens to Put Oil Companies Down

How Much Lower? A Triple Play Continues to Drive Oil Lower

Correspondent Derek Armstrong

Oil prices have not found bottom in the face of the ongoing credit crisis and a recession which saps demand, regardless of reserves. The old theories of price control via OPEC, through their oil capacity control, no longer impacts oil prices as the bottom of demand has not yet been found.

The recent OPEC target cut of 1.5 million barrels per day had no impact whatsoever on prices, not even a slow-down in the sink-drain-like spiral of prices. In all recent target cuts from OPEC, the strategy has worked to raise or stabilize. This time, in the face of cheating members, not only is the goal not met, it’s having no impact on barrel prices. Many analysts believe it will have a marginal slow down impact only. Partially, this is the logic of surplus.

The cut has not been sufficient to test the reserves, which continue to row rather than shrink due to conservation by wary consumers. The Plunge Continues From dizzy heights of $147 a barrel, to below $40, the price is expected to drop to a projected $25, according to Merrill Lynch, as recession fears and credit continues to put the brakes on the economy.

The main upside is conservation and the environment, but with a devastating impact on an already struggling economy, especially in oil-rich countries and resource-dependent countries such as Canada. Since the oil and gas industry is all about price, low prices mean the industry will almost certainly put projects in mothballs and put the brakes to exploration.

Oil Companies Could Survive Except…

The bigger issue becomes one of credit. When lenders base their projections and loans on $80 average barrel prices, a potential $25 oil price means not only do wells dry up, but lines of credit as well. The combination of crashing oil prices, credit pressures and a recession is a triple header that threatens to put many companies down to defeat — for now. Optimistic projects have the industry turnaround pegged at one year. Pessimistic at five. But either way, recovery will happen. By then, however, the world will have changed.