Whitepapers by Amir


The Impact of Falling Oil Prices

January 2015

by Amir Sardari, President & CEO

Many people in the investment community ask the question, “What is the impact of falling oil prices?” The oil industry goes through a structural change almost every 10 to 15 years and has experience highs and lows due to supply and demand. In the last six months, daily headlines tell the story of falling oil prices. Prices fell from over $100 per barrel in July 2014 to under $50 and perhaps below $40 per barrel; representing a 50% price reduction. The market is experiencing a shift in a supply-demand balance. However, the price of oil is resilient due its actual cost of production as well as real demand and will weather through to make a strong rebound.

The downside of low oil prices will impact exploratory projects, hydraulic fracking projects, and mega projects for LNG export as well as crude oil production. This impact is primarily a result of profit margins based on $90 to $100 per barrel prices. New large-scale exporting LNG projects will slow down however they will bounce back within a couple years. Planned U.S. LNG projects already under construction or committed construction projects with long-term contracts will continue as many projects will avoid the negative aspect of lower oil prices.

The upside will provide financial relief for American consumers and the manufacturing sector to the tune of $150 billion dollars. In addition, the manufacturing sector will benefit strongly from lower energy cost, that some portion may also be transferred to the consumers. We are witnessing an increase in consumer spending which directly benefits retailers throughout the country.

The clean energy revolution is one of the biggest factors for America’s economy for the next 10 to 20 years. The U.S. has transitioned from a significant net energy importer to a near self-sufficient state and close to an exporter. Morgan Stanley’s economics team is predicting that crude oil prices will bounce back to the mid-$80s a barrel in 2015 from their recent plunge. “U.S. LNG has value beyond its price, and the benefit is greater flexibility for buyers”, noted Alex Munton, a senior analyst for North America Gas & LNG with Wood Mackenzie.

Our economy relies on transporting people and products by way of the trucking, shipping and railway industry. The over-the-road transport industry is a vital part of our American economy. Regardless of oil prices LNG is an essential part of the equation due to EPA demands to reduce greenhouse gas and emissions. Most fleet owners are looking for solutions to stay compliant and reduce cost. Surprisingly, lower prices have not prevented our nation’s forward-thinking fleet owners and fleet managers from implementing ways to save fuel and improve their sustainability efforts. For heavy-duty applications, the choice of transportation fuel and substitute for Diesel is LNG. Green fleets are finding various ways to save money by implementing route optimization, right-sizing, transporting more freight in the same number of trailers and most of all converting to cleaner burning fuel.

In closing; We feel the rebound will gradually effectuate in late 2015, and 2016 and LNG will continue to be a short term & long term solution providing companies with multiple strategic benefits.