The price of WTI crude, which danced around the US$100 per barrel mark for a number of years, has plummeted since mid-2014 to around US$40 in August 2015 – a 60% decline in just over a year. Cause for cheer for some, an absolute horror show for others.

The winners and losers

There’s plenty of news coverage on the winners, and the losers, from the oil price collapse:

• Amongst the worst hit are oil exporters like Russia and Venezuela, facing soaring costs of sovereign debt and budget deficits, oil majors who are cutting capital expenditure, and rig builders such as Keppel & Sembcorp Marine who face cancellations and requests for delayed delivery, instead of new orders. The capital markets have also taken a beating – big players like Transocean are seeking to cancel planned dividend payments, and shares in listed oil & gas players are a fraction of what they were 12 months ago.
• On the flip side, consumers have benefitted from cheaper consumer goods and cheaper pump prices (while this isn’t obvious in countries where taxes limit petrol price fluctuations, it makes a significant difference in places like the US). In the shipping sector, not all is gloom as container liners have seen cheaper bunker prices boost bottom lines and tanker operators enjoy increased demand for tonnage as more cheap oil gets shipped to boost stockpiles in oil-hungry countries. While lawyers complaining about a slowdown in work will be unlikely to attract any sympathy, law firms’ workloads are often a good indicator of economic activity in the broader market. Lawyers specialising in energy projects have, unsurprisingly, seen work flow affected as marginal projects get canned or delayed. As banks cut their exposure to the oil & gas sector, lawyers specialising in energy projects and ship financing will see less work as rigs and offshore vessels become less viable. Yet it’s not all doom and gloom across the board. Oil companies will acquire complementary businesses to streamline operations and achieve greater cost efficiency. Companies with cash and healthy balance sheets may look to acquire targets sporting more attractive valuations. And the ball may have already started rolling – Schlumberger is acquiring Cameron International; Berkshire Hathaway is taking up a US$4.5 billion stake in oil refiner Phillips 66; and closer to home, Ezra Holdings is selling a 50% stake in its subsea unit Emas AMC to Chiyoda Corporation. M&A lawyers will likely be monitoring this space with keen eyes. In these stormy waters, restructuring and litigation lawyers will also be kept busy.

The Big Picture

Amidst the analyses of the economic impact of cheaper oil, has anyone sensed that with this oversupplied market, calls for energy conservation and the push for renewable energy have become more muted?

Doomsday projections of the world running out of oil in the foreseeable future have also become less fashionable. The issue certainly seems to be getting less air time now, compared to when oil hit US$140, and was projected to reach US$200 within months.

Not so long ago, US President Jimmy Carter (ok, it was way back in 1977, but surely that’s a blink of an eye in the grand scheme of things), in a televised speech to the Americans, described the need to balance the demand for energy with shrinking resources as the “moral equivalent of war”. He postulated that with rising consumption, the world could use up all its proven oil reserves by 1990. He also said that the US could not substantially increase domestic production.

We know with hindsight that he was painting an overly pessimistic picture. Advances in technology mean that we can today find oil where we previously couldn’t – the Ramform seismic survey vessels operated by PGS have been likened to space explorations in the way they obtain complex seismic data. We can also now reach more of what we find – oil wells have been drilled to a depth of over 40,000 feet (Mount Everest is about 30,000 feet above sea level). The introduction of horizontal drilling also means that most oil wells are well within reach. One of the greatest advances (and one which has attracted extensive debate over its benefits vs. environmental consequences) is the process of hydraulic fracturing, which is a method of releasing oil or gas that is bound with shale rock using powerful water pumps exerting immense pressure. This process becoming commercially viable has allowed the US to expand oil extraction so much that it could potentially be a net oil exporter. Next door in Canada, technology is making it viable to extract oil that is mixed with sand.

All in all, oil seems to be plentiful after all. In a discussion paper by Leonardo Maugeri which Harvard University published in 2012, he analysed the major oil exploration and development projects across the world and concluded that there are trillions of barrels worth of reserves out there.

Jimmy Carter was, however, absolutely right about rising consumption. According to the U.S. Energy Information Administration, the world consumed about 60 million barrels of oil a day in 1980 and about 90 million barrels a day in 2010. It also projected that China will, by 2040, double its 2014 consumption of about 14.7 million barrels a day. There is no doubt that the world’s population is growing, and more of it will have higher standards of living and be more dependent on oil than before. HSBC, in a report released in April 2011, suggested that based on current consumption levels, the world will run out of oil in 2060.

It seems to be a high stakes debate over whether present oil reserves will run out first or whether there is enough of it such that new technologies will continue to ensure its plentiful supply far into the future or buy sufficient time for alternative energy sources to be found.

It is perhaps most appropriate at this juncture, when oil is plentiful and cheap, that we remind ourselves of the need to reduce our carbon footprint – the simple fact is that oil is a limited resource and will eventually run out. It is simply too dangerous to assume that by the time it does, the limitless ingenuity of the human mind would have somehow found a solution or a viable alternative fuel source.