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.
Highlights
The price of oil is probably the single most important economic variable in the global economy
Analyses of the price plunge predicted a quick rebound in price: the low price was temporary, in the absence of a 2008-style global economic meltdown; the oil price would bounce back to $100 per barrel
The three steps involved in a discounted cash flow (DCF) analysis
Summary
The price of oil is probably the single most important economic variable in the global economy. U. Omoregie oil price over such a short space of time would be the opposite of the short-lived price hike that occurred in the first half of 2008 (a market distortion that was corrected the following year). The 12-member cartel rejected calls for drastic action to cut their oil output. By keeping their production ceiling unchanged, OPEC members signaled that they were ready for a period of lower oil prices. OPEC’s 27 November 2014 decision was a pivotal moment that had implications for the future of oil prices over the 12 months. As at the time of writing (November 2015), Adam Smith’s invisible hand had replaced the visible hand of OPEC as the controlling force for the oil market. According to The Economist [2], 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
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