Falling Oil Prices – Threat To Investment Decisions

Falling Oil Prices Threat To Investment Decisions
Falling Oil Price

The volatility of oil prices and its effect on investment decisions are some of the worries expressed by world energy leaders at the seventh edition of the World Energy Issues Monitor entitled “Energy Price Volatility: The New Normal” organised by World Energy Council (WEC) this week.

Besides, they identified energy affordability and energy poverty as some recurring top critical uncertainties for Nigeria’s energy leaders.

The experts surmised that falling oil prices might be the new normal as there seems no end in sight

It stated: “This is the context in which we expect them to take investment decisions at an unprecedented scale. The unprecedented uncertainty, the need to redefine infrastructure resilience in response to emerging risks, the expectation of changing market designs and evolving business models, as well as the changing geopolitical balance have all placed energy among the top strategic issues globally for at least the next decade.

It noted that the importance of choosing smart policy options and innovation strategies has become greater than ever, and balancing the energy dilemma must be at the very centre of efforts of energy leaders.

According to the group, in 2015, price volatility remains a key concern, demonstrated by the more than 50 per cent drop in price over seven months where a barrel of crude oil (Brent) was priced at $108 in January 2014, reached its peak price of $112 in June before falling below the $50 benchmark in early 2015.

It added that these dynamics have set the precedent for an anticipated low price environment, the start of which ‘we have seen with an effective price war between OPEC and North America as the focus shifts from OPEC price control to that of maintaining market share’.

Dwelling on the energy situation in Nigeria, WEC said that domestic energy use in Nigeria is largely dependent on traditional biomass and wastes, which make up 83 per cent of Nigeria’s primary energy consumption.

It noted that the high rate of traditional biomass use highlights the country’s poor electrification rate, leaving nearly 85 million out of the country’s 170 million people without access to energy.

The report stated: “Energy subsidies is a high change issue, having moved from the weak signal quadrant to a top critical uncertainty in 2015. Energy subsidies present a large burden on the government’s budget, accounting for approximately 30 per cent of government expenditures (in 2011). At the same time low energy prices are putting additional pressure on the government’s budget as 70 per cent of the nation’s income are from crude oil and LNG exports.

“The high impact and uncertainty for energy subsidies in 2015 could be related to two key factors. Firstly, the continuing market distortions caused by the energy subsidies are increasingly leading to insufficient maintenance and reinvestment into Nigeria’s energy network, exacerbating Nigeria’s energy access and supply reliability challenges.

“Secondly, the high uncertainty may be related to the plans announced by Nigeria’s President Goodluck Jonathan in late 2014 to cut fuel subsidies by 50 per cent. The upcoming general elections in 2015 and the related uncertainties with regards to the future of the suggested subsidy cuts may thereby contribute towards the perceived energy subsidy uncertainties.

It said that the implications of continuous price volatility will be broadly felt – from both the business side, as further project completion bringing additional supply to market and exploration and production budgets are re-evaluated, as well as for governments, especially those with a high degree of dependency on oil export revenues.

The report also finds that developing electric storage and the quest for energy finance to continue to keep energy leaders busy.

The energy leaders believed that these issues would be influenced by the future of energy subsidies, a key ‘need for action’ area in the 2015 survey, with the design of market mechanisms playing an important role.

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