Why the high profit margins that the oil industry enjoyed, are now at an end.
One thing is clear, the crash in oil prices caused by Russia’s s decision to not to agree with Saudi Arabia to cut back on oil production, is certainly bad news for America’s fracking industry, Wall Street and possibly Trump’s re-election prospects. But, in the long term it is possibly good news for both Russia and Saudi Arabia.
Fracking in trouble
The American fracking sector is already deep in trouble, with some $86 billion in debt, due for repayment in the next few years, and many fields facing the prospect of failing to break even when the oil price falls below $50 per barrel. We have already seen a string of financial right downs, redundancies, consolidations and bankruptcies in the franking business.
Unlike the American’s, both the Saudi’s and Russians, can survive, for example, the Saudi’s can still make a profit on much of their output at $20 per barrel, and the Russian’s have sufficient budgetary reserves to meet budget shortfalls for at least six to ten years.
Low oil prices profit prospects
It is clear, that with the prospect of low oil prices, gone are the days when oil projects earned between 8% to 15% internal rates of return. Instead, oil investors are more likely to see more normal rates of return, such as experienced in renewables investment, for example 7% for wind and 5% for solar.
One thing is clear; it is almost as if Trump’s so-called political foreign allies are out to ensure Trump is not re-elected! Also to maintain profit margins, and protect the achievements of the fracking industry, the oil business will have to significantly cut its costs and boost its investment in technology.