Will I lose my job with lower oil prices?

Crude oil was US$116 (S$165) a barrel in 2011 but has plummeted to a 13-year-low, hovering at about US$27 a barrel last week. Why are prices lower and how do they impact you?

WHY THE LOWER PRICE?

There's one explanation behind the tumbling oil prices that is related to supply and demand.

Once an oil well is drilled, it can continue to produce for several years. In theory, these wells can be stopped and restarted, but the costs involved tend to discourage doing this.

Petroleum geologist Arthur Berman, who is consulting for several oil exploration and production companies and capital groups in the energy sector, explained that "if the world consumes more oil than it produces, the price goes up".

But if more oil is produced than the world consumes, the price goes down," he added.

Put simply: "The world is producing more oil than it is consuming."

IS THERE AN OIL PRICE WAR GOING ON?

With advances in technology and rising oil prices, it has been profitable to extract oil in the US from shale - a sort of rock.

That would have reduced the US' dependence on Middle Eastern oil.

But it has been estimated that only 1 per cent of shale extraction is profitable at US$30 a barrel.

If the Middle East continues to mass produce barrels at the current rate, it will make the new US extraction techniques inefficient and too expensive in the long haul.

Not many countries can profitably extract oil for under $30 per barrel - only Saudi Arabia, Iran and Iraq can.

WILL I LOSE MY JOB?

It depends.

UOB senior economist Alvin Liew told The New Paper that "oil price developments are just one part of the equation but do not account for the whole picture".

If you are directly involved in the oil and gas industry here, it may be a rough ride.

While Singapore is not an oil producer, the recent decline depressed orders for Singapore's marine and offshore engineering sector.

How? Well, Singapore is one of the world's top three export refining centres and a major oil rig builder.

To explain the effect, Ms Selena Ling, head of treasury research and strategy at OCBC Bank, said: "International oil majors and national oil companies continue to slash capital expenditure amid the crude oil price slump."

The perfect example is the marine and offshore segments, which are tightening budgets.

A Ministry of Trade and Industry (MTI) spokesman explained that oil companies will spend less. There are already fewer new orders at local shipyards and rig builders.

He said that the companies in this sector are "trying to manage their overheads and reduce costs so as to ride out the downturn".

There has also been job losses at banks.

London-based bank Standard Chartered retrenched at least half a dozen oil and gas advisory banking advisers last month, ending an eight-year attempt to build a global energy M&A (mergers and acquisitions) team.

Four of them were Singapore-based managing directors.

OUR ECONOMY, HOW?

It may weaken depending on how panicky companies get.

Dr Walter Theseira, 37, senior lecturer at SIM University, said: "Economic growth is going to be unstable, which leads companies to make less risky decisions in areas like global investment, which can further contribute to slackening demand."

WILL I BE ABLE TO TRAVEL FOR CHEAPER? WILL SHIPPING COSTS FOR MY AMAZON ONLINE SHOPPING BE CHEAPER?

Chances are, no.

Why? One word - hedging.

Hedging is where airlines lock in a portion of their required future fuel needs at an agreed price .

If prices go up, airline companies are safeguarded from the higher cost. If prices go down (like it has now), airlines have no choice but to abide by the deal.

The Straits Times recently reported that "SIA hedged about 65 per cent of its fuel needs for the period from last October to this March at an average price of US$116 per barrel".

That is more than double the current price of jet fuel.

Another reason why airlines have not cut surcharges?

They don't see the need to. If you need to travel, you will book your air ticket.

Aviation analyst Shukor Yusof of Endau Analytics told The Straits Times that "airlines show little desire to slash fares when demand continues to be strong".

WILL I SAVE MONEY ON PETROL NOW?

Yes! You will.

You'll probably be able to enjoy the lower fuel costs more if you've been driving since 2014.

According to data from Petrol Watch, diesel fuel from Caltex costs about $1.05 per litre about two weeks ago, 66 cents down from $1.71 per litre in mid-2014.

During that same period in 2014, Grade 98 petrol from Caltex was priced at $2.46 per litre but has dropped about 23 cents to $2.23 per litre.

IS THERE ANYTHING GOOD THAT WILL COME FROM THE PLUNGING OIL PRICES?

Yes! Lower electricity and utility costs.

OCBC Bank's Selena Ling said: "The lower oil prices are likely to continue to weigh on the negative headline CPI inflation prints for at least the first half of this year, through the electricity and utilities costs, which should benefit both households and businesses."

While there have been benefits, not everyone experiences the same level of "joy".

An MTI spokesman said: "Businesses in general have benefited from lower utilities and fuel-related costs as a result of lower global oil prices.

"However, the specific impact would vary depending on the sector the businesses are in."

crobert@sph.com.sg

This article was first published on February 1, 2016.
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