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by Liam Kirkaldy
09 January 2015
Expert predicts falling oil price set to continue

Expert predicts falling oil price set to continue

Slow growth in the world economy coupled with high levels of oil production mean that the price of oil is likely to continue to fall, according to a world-leading expert on petroleum economics.

Professor Alex Kemp, Director of the Aberdeen Centre for Research in Energy Economics and Finance, said that as long as Organisation of the Petroleum Exporting Countries (OPEC) members continue to produce at current levels in an effort to maintain their market shares and the world economy continues to perform poorly, oil prices will stay at present levels or even drop further.

Kemp told Holyrood: “In the near term there is nothing much to stop the price of oil from falling, and it could fall a little more because if you consider the middle east OPEC producers – like Saudi Arabia – if the price is $50 they could produce more barrels and still make a profit, while in high cost areas they couldn’t do that.

“There has been continuous growth in production from the United States, particularly with shale oil becoming big, and in December, for the United States as a whole we have seen record production compared to the previous decade or so and that is continuing. In Russia there is also very high oil production, a record for recent years, so when you add these demand and supply factors together then you can see that the balance between supply and demand has brought the price down.”

Kemp also suggested OPEC could struggle to stabilise the uncertain market.

“Another possibility is that there will be an emergency OPEC meeting. It said on 27 November that it would not meet again until June but some of the members are really suffering right now, for example, Venezuela, Iraq, Iran – they are suffering very badly – and the price they are getting is not enough to ensure that they cover their budget needs by a long way.

The SNP has come under pressure from opposition parties over the difference between the projections contained in its White Paper on independence and the current price, with Scottish Labour pointing to research which suggests that up to 35,000 jobs could be lost in the industry.

Kemp predicted that the worst effects of the shock in the North Sea have yet to be seen.

He said: “The North Sea sector is very high cost and already we have seen redundancies and contractors rates being cut and I would expect that it if the present price prevails then a number of new developments will no longer be viable, so they will be put on hold. The company’s budgets can all be cut, particularly for capital expenditure projects, so we can expect that investment in fields and projects will decrease significantly this year, and that will include exploration as well. As the year progresses I would expect that the more serious effects will become visible.”

Reacting to the drop in price, Scottish Labour Economy Spokesperson Jackie Baillie MSP said: “The oil price is under half the price predicted in the SNP’s White Paper, having dropped beneath 50 dollars a barrel yesterday.

“There is a huge threat to jobs here, the industry and economic experts predict that up to one in 12 oil jobs are at risk. These are not only people who directly work in the industry but the local economies in the North East, and people across Scotland who work in the supply chain. We need action, and we need action now.”

Labour has recommended the creation of a ‘resilience fund’ to support the industry.

The SNP meanwhile has demanded the UK Government urgently reforms the taxation regime for the oil industry, with measures including the creation of an investment allowance for high cost fields and an exploration tax credit.

Scottish Energy Minister Fergus Minister Fergus Ewing said: “The oil and gas industry is a strong success story for Scotland and will continue to be. However, because of the mismanagement of oil and gas fiscal policy by the UK Government, challenges remain and we must tackle the on-going cost pressures and the fall in oil prices head on.”

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