The collapse of oil prices has led many oil producers to pack up their rigs and stow their jacks, yet, some other producers were satisfied by cutting costs. As a matter of fact, many refineries were shut down due to the low oil prices, while others warns that it will lead to a spike of oil prices in the coming years

Accordingly, many critics warn that the failure of companies to invest sufficiently in new drilling projects could lead to a spike of oil prices in the coming years. They believe that a supply crunch would take place by the year of 2013.

Lower oil prices have been one of the few bright spots for consumers in the current market conditions, although the situation has also been more difficult for countries depending on oil exports for revenues. Consequently, the price decline has already resulted in lower investment and maintenance spending that, in return, led to reduced capacity and production.

According to a report by the USA Today, energy companies have been scaling back investments in future projects, which could ultimately result in price spikes and shorter supplies. Already, Total, Europe’s largest refiner, said it would shut a quarter of its Gonfreville Plant, the biggest in France.

Old refineries are particularly vulnerable. Swiss-based Petroplus will turn its UK Teesside plant into a depot if it cannot find a buyer, while Italy’s ENI intends to sell its Livorno Plant.

Morgan Stanley said in a research issued last month that the measure for refinery profitability would average about $4 a barrel in Northwest Europe this year; less than half of the bank’s estimate of $8.47 last year.

Europe’s oil industry has long relied on supplying the U.S market with gasoline, but a source at Total’s Gonfreville said profit margins have collapsed as gasoline exports had shrunk.

With European oil consumption itself in long-term decline, refiners may now shift from simply reducing gasoline output to permanently cutting the capacity of crude distillation units, or even closing a refinery. European refineries can process 16 million barrels per day (bpd) of crude.

International Energy Agency (IEA) data shows that the demand for oil products in European OECD nations will fall to 14.7 million bpd this year.
Low oil prices, which are not related to technology and lower production costs, have depleted oil reserves, increased the income gap between consumers and producers, created friction among the Organization of Petroleum Exporting Countries (OPEC) Members and between OPEC and non-OPEC producers, and led to the imposition of tariffs on oil imports in consuming countries. In addition, they have led to an economic hardship in oil-producing countries, including declines in oil revenues, budget deficits, budget cuts and cancelled projects, borrowing and debts, deterioration in the balance of payments, negative economic growth, currency devaluations and political unrest. All these factors have affected the oil companies through reduced earnings, forced layoffs of workers, lower investment and increased mergers. Despite these disadvantages, oil producers may benefit from low oil prices in the long run. They will increase demand, slow the process of substitution and decrease non-OPEC production.

On the other hand, consumers take advantage from low oil prices, through higher economic growth and disposable income, and lower legislative and import costs. However, these benefits do not come without cost; low prices will increase the future vulnerability of consuming countries and lead to more dependence on oil at the expense of alternative energy sources, more dependence on oil imports, more waste, more environmental damage and less efficiency.

After outlining the advantages and disadvantages, the conclusion is that the disadvantages of low oil prices outweigh their benefits; that is, low oil prices have caused substantial damage. This is due to market inefficiencies and imperfections that include government intervention, especially in consuming countries.

Elsewhere, others think that it simply does not make sense to throw millions of dollars for drilling new wells, when oil counts for $50. Consequently, a growing drumbeat of news reports about energy projects of all kinds being delayed, cancelled, slowed, or otherwise curtailed has been issuing from the energy sector. Yet, the industry playmakers seem not to have recognized that the slowdowns will limit supply in just a few years. Instead, they have continued to bid down prices of oil and gas, with the belief that a slower economy means slower demand and a glut of supply.

By Ahmed Morsy