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Impact of Increased Oil Prices

Delivered March 12, 2020. Contributor: Kathryn H.

Goals

Determine the probability of West Texas Intermediate (WTI) oil prices reaching $20 per barrel given that OPEC does not agree on new quotas. Identify the estimated impact of $20 per barrel oil price on the global and US economy and on Shale producers, particularly small independents. Identify potential survival strategies for independent shale producers given a $20 per barrel price.

Early Findings

Probability of $20 WTI Price

  • On March 8th, Goldman Sachs analysts estimated that WTI oil will trade at $29 per barrel in the second quarter and $28 per barrel in the third quarter.
  • The Goldman Sachs analysts warned that Brent Crude oil was likely to reach $20 per barrel, not WTI.
  • On March 9th, WTI prices fell as low as $30, which is a record low since August 2016, when it reached $26.05. 
  •  Ali Khedery, former senior Middle East advisor at Exxon, said that "$20 oil in 2020 is coming."

Impact on the US Economy

  •  Low oil prices mean less drilling and exploration activity and layoffs in the oil companies which can impact the local businesses that cater to these workers, meaning that the negative impact will be felt keenly in the shale regions of the US.
  • The banking and investment sectors also suffer during oil price drops.
  •  Paul Ashworth, chief North American economist for Capital Economics said that lower oil prices should be neutral for the US economy, but there are some risks.

Impact on the Global Economy

  •  James Williams, an energy economist at WTRG Economics, said that forecast of the economic impact are "all over the place" because it is hard to predict due to the lack of data about the epidemic's length and spread.
  • The Paris-based International Energy Agency projected that oil demand would fall by 90,000 barrels a day in 2020.

Impact on Small, Independent Shale Producers

  •  Tom Kloza, chief oil analyst for the Oil Price Information Service, does not believe that US shale oil producers are likely to make deep trims in production, even if they are losing money on oil.

Proposed next steps:

You need to be the project owner to select a next step.
Our preliminary research revealed a diversity of information about estimations for the WTI price and for its impact on the US and global economies and small shale producers. We recommend proceeding by creating three requests, one to determine the impact on the US economy, a second to determine the impact on the global economy, and a third to determine the impact on small independent shale producers. Each would identify 3-4 ways that it would be impacted by record low WTI prices. For each impact, we would explain the impact and provide evidence from experts who anticipate this impact.
Furthermore, we recommend further dedicating one request to identifying the likelihood that WTI prices would reach $20, what would cause them to dive so low, and what the lowest price they are likely to reach is. For each of these questions, we would provide sources from experts to corroborate. Finally, we recommend creating one request to identify 3-4 strategies that small, independent shale producers are likely to use to survive record low oil prices. For each strategy, we would provide an explanation, evidence from experts that supports the claim, and, if possible, an example of a producer that is using or planning to use the strategy.
Other: You tell us how to proceed.