The Oil Price Crash of 2014: Implications for a Multi-Billion Dollar LNG Project
Author(s)
Uyiosa Omoregie
ABSTRACT
The price of oil is probably the single most important economic variable in the global economy. The rapid drop in price of oil in 2014 set analysts and commentators busy, trying to predict its trajectory and implications. More than $150 billion of investments have been cancelled by oil companies in 2015 due to the low price of oil, with more spending cuts to follow in 2016. The oil price decline was supposed to catalyze a transfer of wealth from oil-producing countries to oil-consuming countries. It was estimated that a $10-a-barrel fall in the oil price transfers around 0.5 percent of world GDP from oil exporters to oil importers. The recent oil price collapse has far-reaching implications for capital projects in the oil and gas industry. The impact of a fall in oil price is analyzed for a large capital investment project, involving the construction and operation of a liquefied natural gas (LNG) plant. The breakeven price (BEP) of oil for the project is determined.
The price of oil is probably the single most important economic variable in the global economy. The rapid drop in price of oil in 2014 set analysts and commentators busy, trying to predict its trajectory and implications. More than $150 billion of investments have been cancelled by oil companies in 2015 due to the low price of oil, with more spending cuts to follow in 2016. The oil price decline was supposed to catalyze a transfer of wealth from oil-producing countries to oil-consuming countries. It was estimated that a $10-a-barrel fall in the oil price transfers around 0.5 percent of world GDP from oil exporters to oil importers. The recent oil price collapse has far-reaching implications for capital projects in the oil and gas industry. The impact of a fall in oil price is analyzed for a large capital investment project, involving the construction and operation of a liquefied natural gas (LNG) plant. The breakeven price (BEP) of oil for the project is determined.
Cite this paper
Omoregie, U. (2015) The Oil Price Crash of 2014: Implications for a Multi-Billion Dollar LNG Project. Natural Resources, 6, 577-582. doi: 10.4236/nr.2015.612055.
Omoregie, U. (2015) The Oil Price Crash of 2014: Implications for a Multi-Billion Dollar LNG Project. Natural Resources, 6, 577-582. doi: 10.4236/nr.2015.612055.
References
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http://uk.reuters.com/article/oil-prices-kemp-idUKL6N0T43JD20141114 [2] The Economist (2015) The Oil Market Abnormally Normal.
http://www.economist.com/news/finance/21678198-once-prices-are-responding-supply
-and-demand-not-opec-why-market [3] Bret-Rouzaut, N. and Favennec, J. (2011) Oil and Gas Exploration and Production. 3rd Edition, Edition Technip, Paris. [4] Hotelling, H. (1931) The Economics of Exhaustible Resources. Journal of Political Economy, 39,137-175.
http://dx.doi.org/10.1086/254195 [5] Giraud, P. (1995) The Equilibrium Price Range of Oil. Energy Policy, 23, 35-49.
http://dx.doi.org/10.1016/0301-4215(95)90764-X [6] Barsky, R. and Kilian, L. (2004) Oil and the Macroeconomy since the 1970s. Journal of Economic Perspectives, 18, 115-134.
http://dx.doi.org/10.1257/0895330042632708 [7] Kilian, L. (2008) The Economic Effects of Energy Price Shocks. Journal of Economic Literature, 46, 871-909.
http://dx.doi.org/10.1257/jel.46.4.871 [8] Dale, S. (2015) Energy in 2014 After a Calm Comes the Storm.
http://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2015/
bp-statistical-review-of-world-energy-2015-spencer-dale-presentation.pdf [9] Dale, S. (2015) New Economics of Oil.
http://www.bp.com/content/dam/bp/pdf/speeches/2015/new-economics-of-oil-spencer-dale.pdf [10] The Economist (2014) Cheaper Oil Both Symptom and Balm.
http://www.economist.com/news/finance-and-economics/
21625819-oil-price-tumbling-good-or-bad-news-world-economy-both [11] Financial Times (2014) Price of Crude Oil How Low Can It Go.
http://www.ft.com/intl/cms/s/0/de459900-6664-11e4-8bf6-00144feabdc0.html#axzz3sKDnaXsx [12] Adeniyi, O., Oyinola, A. and Omisakin, O. (2011) Oil Price Shocks and Economic Growth in Nigeria: Are Thresholds Important? OPEC Energy Review, 35, 308-333.
http://dx.doi.org/10.1111/j.1753-0237.2011.00192.x [13] Arora, V. (2015) Oil Prices and the U.S. Economy: Where Is the Boom? Economics Discussion Papers, 48, Kiel Institute for the World Economy.
http://www.economics-ejournal.org/economics/discussionpapers/2015-48 [14] Paltev, S., O’Sullivan. F., Lee, N., Agarwal, M., Li, X. and Fylakto, N. (2013) Natural Gas Monetization Pathways for Cyprus: Interim Report—Economics of Project Development Options, MIT Energy Initiative. Massachusetts Institute of Technology, Cambridge, MA. [15] Lazson, N. and Ikiensikimama, S. (2013) Economic Analysis of Liquefied Natural Gas Floating Production Storage and Offloading Plant (LNG FPSO) Using Probabilistic Approach. Advances in Petroleum Exploration and Development, 5, 42-50. [16] Mian, M.A. (2011) Project Economics and Decision Analysis, Vol. 1: Deterministic Models. 2nd Edition, PennWell Publishing Co., Tulsa. [17] Rodrik, D. (2015) Economics Rules. Oxford University Press, Oxford, United Kingdom. [18] International Energy Agency (2015) World Energy Outlook.
http://www.iea.org/bookshop/700-World_Energy_Outlook_2015