Strategic Questions in the Oil Market

Mainly the most recent U.S. shale oil boom has changed the dynamics in global oil markets and has initiated a phase of low oil prices that started around the end of 2014. Since then, oil producers are under growing pressure to guarantee incomes and finance their state budgets. Especially the Organization of Petroleum Exporting Countries (OPEC) was forced to take strategic decisions in handling the situation of a global oversupply. After two years of defending market shares in a low-price environment, OPEC decided to negotiate a production cut with other big suppliers (OPEC+) and stabilize prices. This strategy is set to be extended beyond 2017.

For all oil suppliers, the present situation poses fundamental strategic questions. One arises from a transformation in the transport sector and the effect of climate policy measures, with increasing shares of alternative fuels and technologies, competing with oil. The other one results from a low price environment in which long-term investments are more and more difficult to justify. This could turn out to be a problem for producers and consumers alike. For the global oil market, the time sequence and the magnitude of change will be essential.